
Class JiBni 

Book . S' 

GopyrightN^.jJr\3. 

COJ?MRIGHT DEPOSm 






MATERIALS FOR THE STUDY OF 
ELEMENTARY ECONOMICS 



THE UNIVEESITY OF CHICAGO PRESS 
CHICAGO, ILLINOIS 



Agwtta 
THE CAMBRIDGE UNIVERSITY PRESS 

LONDON AND EDINBUEGH 

THE MARUZEN-KABUSHIKI-KAISHA 

TOKYO, OSAKA, KYOTO 

KARL W. HIERSEMANN 

LEIPZIG 

THE BAKER & TAYLOR COMPANY 

NEW YORK 



MATERIALS FOR THE 
STUDY OF 

ELEMENTARY ECONOMICS 



EDITED BY 

LEON CARROLL MARSHALL 

CHESTER WHITNEY WRIGHT 

JAMES ALFRED FIELD 

OF THE DEPARTMENT OF POLITICAL ECONOMY 
THE UNIVERSITY OF CHICAGO 




THE UNIVERSITY OF CHICAGO PRESS 
CHICAGO, ILLINOIS 



,5 



Copyright 1913 By 
The University of Chicago 



All Rights Reserved 



Published September IQ13 



Composed and Printed By 

The University of Chicago Press 

Chicago, Illinois, U.S.A. 



^'P 



©CI.A35 70 9 



PREFACE 

The materials collected in this volume are intended to acquaint 
the student with economic principles as they are manifested in the 
tangible facts of economic life. A few extracts of primarily theo- 
retical character have been included to represent important aspects of 
contemporary or historic thought ; but for the most part the selections 
are not so much authoritative formulations of economic laws as con- 
crete case-material embodying such laws, or affording a background of 
information which the systematic treatises on economics can hardly 
give and which the teacher certainly cannot often assume that his 
students will possess. Various sources have been drawn upon, in- 
cluding not only the writings of recognized economists but also official 
literature of governmental and private organizations, commercial and 
financial periodicals, and the daily press. Some of the material has 
been prepared especially for this book. As regards form, the selections 
comprise expository and descriptive readings, statutes, judicial 
decisions, the findings of commissions, news reports, statistical tables j 
schematic analyses, and a number of maps, charts, and diagrams. 

In the choice of the materials the editors have been guided by 
actual classroom experiment. The nucleus of the book was originally 
printed as a series of bulletins which have for three years formed a 
part of the reading required of beginning students in economics at the 
University of Chicago. During this time unsatisfactory selections 
have been eliminated and much new matter has been added. Copies 
of the bulletins have been submitted for criticism to teachers in several 
other institutions. The volume which now appears may thus be said 
already in a measure to have demonstrated its usefulness as an aid 
in college instruction. 

The book is not designed to take the place of a systematic text- 
book. Rather, it should be used in conjunction with such a text. 
No attempt has been made to weld the readings into a hard-and-fast 
system. They have purposely been left to be utilized as the preference 
of the individual teacher may dictate. There has been no desire to 
dogmatize, or to force upon the student any particular interpretation 
of the evidence. In some cases conflicting views are set forth in 
different selections in order to stimulate critical thinking; and several 



vi PREFACE 

extracts have been included precisely because they seem to involve ^ 
unsound thinking, or a point of view so remote from the academic as 
to deserve consideration for that very reason. 

The editors wish to acknowledge their obligation to the many 
authors and publishers who have kindly permitted the use of extracts 
from copyrighted publications. Every effort has been made to give 
due mention of author and publisher in each instance. Where a 
selection is stated to be "adapted from^' the writings of a certain 
author the reader will understand, not that the changes from the 
original have necessarily been considerable, but simply that some 
change has been made for which the author is not accountable. 
Where no source is indicated for a selection, either by footnote or 
by the obvious nature of the topic, it may be understood that the' 
editors assume responsibility. 

L. C. M. 
C. W. W. 

J. A. F. 

September, 19 13 



TABLE OF CONTENTS 

PAGE 

I. Introductory 

1. The Maladjustment of Man and Nature. T. N. 

Carver i 

2. Man's Adaptation of His Environment. Max Nordau 8 
v/ 3. Ways of Getting a Living. T. N. Carver .... 10 

4. Competition and the Industrial Revolution. Arnold 

Toynbee 11 

5. Exchange Co-operation. Adam Smith 17 

II. Wants and the Means of Their Satisfaction 

6. A Study of Human Wants 20 

7. The Apportionment of Expenditures. F. H. Streightof 27 

8. The Standard of Living. F. H. Streightof .... t>2> 

9. A Normal Standard of Living. Massachusetts Com- 

mission on the Cost of Living 37 

10. A Classification of the Means of Satisfying Wants. 

T. N. Carver 41 

11. Typical Cases Illustrating the Existence of Wealth 

Behind Property Rights. Irving Fisher .... 42 

12. Forms of Wealth. Irving Fisher 44 

13. Foriris of Property Rights. Irving Fisher .... 44 

14. Estimate of the Wealth of the United States. Special 

Census Report 45 

15. The Production of Economic Goods. J.A.Hohson . 45 

16. A Classification of Industries, J.A.Hohson ... 55 

HI. Natural Resources as Economic Factors 

17. The Function of Natural Agents. 0. T. Mason . 58 

18. The Influence of Geographic Factors. E. C. Semple . 61 

19. The Frontier in American History. F. J. Turner . 66 

20. An Illustration of the Law of Diminishing Returns 73 

21. Factors Counteracting Diminishing Returns. J. S. 

Mill 74 

22. Natural Resources of the United States and Their 

Conservation. National Conservation Commission . 77 

23. The Economic Possibilities of Conservation. L. C. 

Gray 102 

vii 



viii tablp: of contents 

PAGE 

IV. Human Beings as Economic Factors 

24. Some Definitions of Labor 105 

25. The Relation of Labor to Natural Agents in Produc- 

tion. /. 5. Mill 106 

26. The Increase of Population in the United States. 

Henry Gannett . 108 

27. The Malthusian Theory of Population 109 

28. Economic Influences on the Marriage-Rate. G. U. 

Yule Ill 

29. The Quality of Population 

a) Non-Survival of the Fittest. W.R.Greg . . . 112 

b) Eugenics 118 

30. The Cost to Society of a Family of Degenerates. 

R. L. Dugdale 121 

31. The Conservation of Human Energy. Irvin?, Fisher 123 

32. Causes of the Growth of Cities. A. F. Weber . . . 134 

33. Immigration to the United States, 1820-1912 (Chart). 

Commissioner-General of Immigration 137 

34. Sources of Immigration and Character of Immigrants. 

Immigration Commission 138 

35. Causes of Emigration. Immigration Commission . . 140 

36. The Problems of Immigration. /. W. Jenks ard W. J. 

Lauck 144 

37. Immigration and the Birth-Rate. F. A. Walker . . 146 

38. Fecundity of Native and Immigrant Wom^n in Rhode 

Island, 1900. Immigration Commission .... 149 

39. Immigration and the Use of Machinery. /. R. Com- 

mons 150 

40. The Recommendations of the Immigration Commission 

Immigration Commission 152 

V. Capital Goods as Economic Factors 

41. The Roundabout Process. E. von Bohm-Bawerk . . 157 

42. Machinery Used in the Making of Pins. Commiss onei 

of Labor 158 

43. Hand vs. Machine Methods, Commissioner 0I Labor 160 

44. Machinery vs. Hand Labor in the Raising of Small 

Grains. Commissioner of Labor 161 

45. Machine Methods in Agriculture. H. V. Quain'ance . 164 

46. Relative Increase of Capital and Employees in Manu- 

facturing 170 

47. Some Sources of the Supply of Capital. Wall Street 

Journal 170 



TABLE OF CONTENTS ix 

PAGE 

48. Capital — Demand and Supply. Journal of Commerce 172 

49. What Is Meant by Depreciation. F. A. Delano . 175 

50. Inroads of War on the Savable Fund. Special Com- 

missioner of the Revenue 179 

VI. The Organization of Industry 

A. Specialization: 

vL/51. Limitations of the Division of Labor. /. S. Mill . . 181 
52. The Tin-Peddler and the Development of Connecti- 
cut Industries. R. M. Keir 182 

jj.^3. Classification of Occupations. Census 183 

54. Stages in the Production of Iron and Steel Products. 

Commissioner of Corporations 1 89 

55. The Localization of Manufacturing Industries. Census 189 

56. The Division of Labor in Pin-Making. Adam Smith 198 

57. Division of Labor in Meat Packing. /. R. Commons 199 

58. Division of Labor in the Shoe-Making Industry. 

Census 200 

B, Management: 
X59. The Problem of the Business Man 204 

60. Problems of Farm Management. T. N. Carver . 206 
^1. The Principles of Business Organization. The System 

Company 207 

62. Scientific Management. F. W. Taylor 219 

63. Criticisms of Scientific Management. H. S. Person 228 

64. Partnership Articles 233 

65. Form of Corporation Charter 234 

66. A Charter "Object Clause" (United States Steel Cor- 

poration) 236 

67. Corporation Charters Granted Before 1800. S. E. 

Baldwin 238 

68. The Holding Company. Interstate Commerce Com- 

mission 239 

69. A Classification of Bonds. F. A. Cleveland . . 241 

70. Examples of Typical Investment Securities . . . 244 . , ' 
^71. The Basis of Capitalization. Industrial Commission 252-)^' ^'^''^A 

72. Methods of Stock Watering. Industrial Commission 257'^*'^*^ H 

VII. Examples of Modern Capitalistic Organization 
A. Railroads: 

73. Transportation Costs in the Pioneer Middle West. 

Isaac Lippincott 259 



\ 



X TABLE OF CONTENTS 

PAGE 

74. Widening of the Market through Improved Transpor- 

tation 260 

75. The Relation of the Transportation Charge to Prices. 

L. G. McPherson 261 

76. Costs in Railroad Operation. /. F. Strombeck . . 266 

77. Added Traffic Pays. A.M.Wellington .... 269 

78. A Result of Railroad Competition. A. J. Cassatt . 269 

79. Some Forms of Railroad Discrimination. Commis- 

sioner of Corporations 270 

80. Extracts from the Interstate Commerce Act. U. S. 

statutes 274 

81. Railway Rate Theories of the Interstate Commerce 

Commission. M. B. Hammond 286 

82. Valuation of Public Utilities. Judicial decisions . . 289 

83. Suggestions for Effective Public Utility Regulation. 

E. H. Downey 291 

B. Industrial Combinations: 

84. Forms of Combination. Industrial Commission . . 299 

85. The Steel Rail Pool of 1887. Commissioner of Cor- 

porations 304 

86. The Continental Wall Paper Company. Judicia' 

decision 307 

87. The American Tobacco Company. Commissioner of 

Corporations 308 

88. The United States Steel Corporation. Commissioner 

of Corporations 313 

89. The Steel Corporation Underwriting Agreement. 

Commissioner of Corporations 318 

90. Companies Acquired by the United States Steei Cor- 

poration. Commissioner of Corporations . . . .323 

91. An Example of Trust Efficiency. Commissioner uj 

Corporations 327 

92. Trust Advantages, Disadvantages, and Remedies. 

Industrial Commission 329 

93. The Sherman Anti-Trust Act. U.S. statutes . . . 338 

VIII. Markets and Trading 

94. Methods of Marketing. A. W. Shaw 340 

95. Marketing Farm Products. Department of Agriculture 352 

96. Retail Distribution of Farm Machinery. Commissioner 

of Corporations 356 

97. The Distributing System of the International Harvester 

Company. Commissioner of Corporations . . . 359 



TABLE OF CONTENTS xi 

PAGE 

98. Co-operative Fruit Marketing. Department of Agri- 

culture 361 

99. Organized Exchanges: The Grading of Cotton. Cotn- 

missioner of Corporations 364 

100. Organized Exchanges: Futures, Puts and Calls. Com- 
missioner of Corporations 367 

IX. Value 

loi. Demand and General Overproduction. /. 5. Mill . 371 

102. Advertising and Demand. A. W. Shaw . . -373 

103. The Ability of the Consumer to Defend Himself. P. T. 

Cherington 374 

104. Some Cases of Demand and Supply. Daily Newspapers 376 

105. Demand and Supply in the Market for Agricultural 

Products. H. C. Taylor 380 

106. Organized Speculation and Its Regulation. H. H. 

Brace 391 

107. A Cost Diagram 396 

108. Items Entering into Cost. W. C. Redfield .... 397 

109. Analysis of the Retail Price of Eggs. C. W. Thompson 407 
J no. Middlemen's Charges in Marketing Agricultural Prod- 
ucts. T. N. Carver 408 

111. Costs in the Retailing of Shoes. Harvard Bureau of 

Business Research 410 

112. Prices to the Small Purchaser. F. H. Streightof . . 414 

113. Package Goods. Massachusetts Commission on the 

Cost of Living 415 

114. Different Costs of Production in Paper Mills. Tariff 

Board 417 

115. Joint-Product Prices: Beef. Commissioner of Cor- 

porations 418 

116. Direct and Indirect Costs. /. F. Strombeck . . 419 

117. Diminishing Cost of Production. Wall Street Journal 421 

118. Joint and Composite Demand and Supply (Diagram) . 422 

119. The Complexity of Competitive Price Making. /. M. 



Clark 



422 



120. Selling Below Cost: Tobacco. Commissioner of Cor- 

porations 426 

121. Price Policies of the Distributer. A.W.Shaw . . 426 

122. Monopoly Price: Coffee Valorization. Robert Sloss . 429 

123. Discriminating Prices: Oil. Commissioner of Cor- 

porations 436 

124. The Burden of Advertising Costs. P. T. Cherington . 438 



TABLE OF CONTENTS 

PAGE 

X. Money and Prices 

125. Exchange by Barter. W. S. Jevons 443 

126. The Early History of Money. W. S. Jevons . . . 445 

127. A Monetary Chronology. U.S. Treasury circular . 451 

128. History of Coins and Currency of the United States. 

U.S. Treasury circular 452 

129. Redemption of United States Money. U.S. Treasury 

circular 455 

130. Legal-Tender Qualities of United States Money. U.S. 

Treasury circular 45^ 

131. Statement of United States Money in Circulation. 

U.S. Treasury bulletin 457 

132. Principles of Token Money. Indianapolis Monetary 

Commission 45^ 

133. Production of Gold and Silver since 1492. U.S. 

Treasury circular 461 

134. Commercial Ratio of Silver to Gold Annually since 

1687. U.S. Treasury circular 462 

135. Gresham's Law: French Coinage 1817-69 (Diagram) 463 

136. Increase in the World's Production of Gold, 1800-1906. 

National Conservation Commission 464 

137. The Increased Cost of Living. Massachusetts Com- 

mission on the Cost of Living 466 

138. The Correction of Price-Changes. David Kinky . . 474 

139. A Compensated Dollar. Irving Fisher 474 

140. The Compensated Dollar: A Criticism. F. W. Taussig 479 

141. Methods of Regulating a Paper Currency. W. S. 

Jevons 483 

142. Paper Money: the Continental Currency. David 

Ramsay 485 

143. Table of the Depreciation of the Continental Currency. 

Thomas Jefferson 492 

144. Greenback Prices During the Civil War (Diagram). 

W. C. Mitchell -493 

145. Depreciated Paper Money in the Confederacy. G. C. 

Eggleston 493 

146. Depreciated Money and Wage-Earners: The Strike at 

Iquique. J. L. Laughlin 496 

XI. Credit and Banking 

147. Credit Instruments 499 

148. The Use of Credit Instruments. David Kinley . . 500 

149. The Clearing House. /. G. Cannon 503 



TABLE OF CONTENTS xiii 

PAGE 

150. The Journey of a Check. /. G. Cannon . . . . 512 

151. Weekly Statement of New York Clearing- House Banks 514 

152. Analysis of a New York Weekly Bank Statement. 

Journal of Commerce 517 

153. Statements of Typical American Banks 518 

154. Number of Private, State, and National Banks, 1877- 

1909. (Diagram.) G. E. Barnett 522 

155. Statements of the Bank of England, The Bank of 

France, and the Reichsbank 523 

156. The Elasticity of Currency. Indianapolis Monetary 

Commission 525 

157. The Aldrich-Vreeland Act of 1908. U.S. statutes . . 531 

158. A Summary View of the Work of the Independent 

Treasury. David Kinley 533 

159. Bankers' Views of Our Banking and Currency Needs. 

American Bankers^ Association 537 

160. The Case against State Guaranty of Bank Deposits. 

A, P. Andrew 545 

XII, International Trade and Foreign Exchange 

161. The Foreign Trade of the United States, 191 2-13. 

Journal of Commerce 547 

162. The Trade Balance of the United States. George Paish 549 

163. The Balance of Trade and Gold Shipments. Wall 

Street Journal 559 

164. Commercial Credits in the Financing of Imports and 
Exports. Franklin Escher 559 

566 
566 

567 
568 
570 

574 



165. A Documentary Commercial Long Bill 

166. The Par of Exchange and Approximate Gold Points 

167. Foreign Exchange Transactions. Howard K. Brooks 

168. Foreign Exchange Quotations. Howard K. Brooks 

169. The Foreign Exchange Market. Franklin Escher . 

170. Factors Affecting the Rates of Foreign Exchange 

Journal of Commerce 

XIII. Tariff Policy 

171. A Summary of the Tariff History of the United States 578 

172. Principal Sources of Customs Revenue, 1912. Statistical 

Abstract of the United States 585 

173. The Balance of Trade and Protection 

a) A Mercantilist Point of View. Charles King . . 585 

b) An American Argument A ssociation of Wool Manu- 

facturers 590 

174. A Home-Market Argument. William Lawrence . . 590 



xiv TABLE OF CONTENTS 



PAGE 



175. Improved Transportation and Protection 

a) An American Campaign Argument. Republican 

Campaign Text-Book 591 

b) A Spanish Analogy. Frideric Bastiat . . . . 592 

176. Two proposals for Increasing the Demand for Labor. 

Frederic Bastiat 593 

177. The Law of Comparative Costs and the Working of the 

Tariff. F. W. Taussig -597 

XIV. Rent 

178. The Origin of Agricultural Rent. F. M. Taylor . . 609 

179. Rent Diagrams 617 

180. Some Factors Affecting Land Values. R. M. Hurd . 620 

181. Railroads and Land Values. /. D. Andrews . . . 627 

182. Land Valuation. R. M. Hurd 628 

183. Car-Fares and Suburban Site- Values. Grosvenor Alter- 

bury 634 

184. The Value of a Chicago Quarter-Acre, 1830-94. Illinois 

Bureau of Labor Statistics 635 

185. Examples of Real Estate Transactions. Chicago 

Daily Tribune . 639 

XV. Wages 

186. Labor as a Source of Income. F. H. StreightojJ . . 640 

187. Two Early Theories of Wages 

a) A Cost of Subsistence Theory of Wages. David 

Ricardo 643 

b) The Wages Fund. James Mill 645 

J. S. Mill ...... 646 

188. Wages and Hours of Labor. Statistical Abstract of tke 

United States 647 

189. Women's Work and Wages. J . A. Hobson . . . 647 

190. Time Wages and Piece Wages. Industrial Commission 659 

191. Wage Systems and Labor Management. C. B. Goin;^ 661 

XVI. Labor Problems 

192. Purposes of the American Federation of Labor 

Official statement 668 

193. Structure of the American Federation of Labor (Dia- 

gram). Official report 670 

194. Membership of the American Federation of Labor. 

Official report 671 

195. Union Charters Issued by the American Federation of 

Labor. Official report 67 1 



TABLE OF CONTENTS xv 

PAGE 

196. Extracts from the Constitution of the International 

Union United Mine Workers 672 

197. Joint Interstate Agreement of Coal Operators and 

Miners. Text of the Official Agreement .... 6^;^, 

198. A Piece-Work Wage-Scale Agreement. Potters' Asso- 

ciation 6qi 

199. The Attitude of the Typographical Union Toward 

Machinery. Industrial Commission 693 

200. The Dayton Employers' Association. A. C. Marshall 694 

201. The National Founders' Association. Official pamphlet 695 

202. The United Typothetae of America. Official pamphlet 698 

203. Industrial Unionism and the Industrial Workers of 

the World. Vincent St. John 700 

204. Statistics of the Extent of Strikes. U.S. Commissioner 

of Labor ^o e 

205. Causes of Strikes. U.S. Commissioner of Labor . . 706 

206. Estimates of Losses Due to Strikes and Lockouts 

a) Twenty Years of Losses from Strikes and Lockouts. 

U.S. Commissioner of Labor 708 

h) Losses from the Anthracite Coal Strike of 1902. 

Anthracite Coal Strike Commission 708 

207. Unemployment and a Proposed Solution of the Prob- 

lem. Royal Commission on the Poor Laws . . . 709 

208. Seasonal Unemployment (Chart) 715 

209. Long Hours versus Efficiency. Josephine Goldmark . 716 

210. The Sweating System. Industrial Commission . , 721 

211. The Economic Theory of a Legal Minimum Wage. 

Sidney Webb 72, 

212. The Minnesota Minimum Wage Law of 19 13. Minne- 

sota statutes y,, 

213. Machinery and the Quality of Labor. J.A.Hobson. 737 

214. Employers' Liability. G. L. Campbell 747 

215. A Survey of Workingmen's Insurance in the United 

States, C. R. Henderson 7^5 

216. Summary of Workingmen's Insurance Laws in Ger- 

many. L. K. Frankel and M. M. Dawson . . . -jSi 



XVII. Interest 



217. Theories of Interest. Irving Fisher 762 

William Smart 764 

218. Interest Rates. W. A. Scott 77, 

219. Conditions in the Money Market. Journal of Com- 

merce ^g^ 



XVi TABLE OF CONTENTS 

PAGE 

2 20. Differences in Rates of Interest on Public Loans. 

o) Special Census Report 7^5 

h) Statistical Abstract of the United States .... 785 

221. Table of Bond Values 786 

222. The Relation of Interest Rates to Rising or Falling 

Prices. H. G. Brown 787 

223. The Theory of Bond Values During a Rising-Price Era. 

W. E. Clark 788 

XVIII. Profits 

224. Walker's Theory of Profits. F.A.Walker. . . . 790 

225. The Risk Theory of Profits. F. B. Hawley . . . 795 

226. Classes of Risks to Capital. A. H. Willett .... 796 

227. The Classes of Risk-Takers. F. B. Hawley . . . 799 

228. Hedging as an Insurance Against Risk. Comvii^siontr 

of Corporations 801 

229. Fire Insurance and Credit. S. S. Iluclmjr .... 807 

230. Embarrassment of Industry through Lack of Insuran:'e. 

Journal of Commerce 810 

231. Some Functions and Effects of In= :rance. John 

Haynes 811 

232. Financial Statements of Two Covporatio is. Annual 

reports 814 

233. Monopoly Profits: The Tobacco Trujt. Commissiomr 

of Corporations 818 

234. An Example of Fortuitous Profits. Sf rial Commis- 

sioner of the Revenue 818 

235. The Profits of an Underwriting Syndicate. Commis 

sioner of Corporations 819 

236. A Classification of Business Failures by Causes. Brad- 

street's 822 

237. Two Instances of Failure. Financial journals . . 823 

XIX. Public Finance and Taxation 

238. The Growth of State and Local Expenditures. W. F. 

Gephart 824 

239. Federal Expenditures (Chart) 828 

240. The Cost of Government, National, State, and Local. 

E. V. D. Robinson 829 

241. Total Debt of the United States, National, State, and 

Local (Diagram). Special Census Report . . . 841 

242. Public Debt of the United States, 1791-1911 (Chart) . 842 

243. Statement of the Public Debt of the United States, 

1913. U.S. Treasury Bulletin 843 



TABLE OF CONTENTS xvil 

PAGE 

244. Total and Per Capita Debt of Different Countries. 

Statistical Abstract of the United States .... 847 

245. Principal Sources of Federal Revenues by Decades, 

1800-1910 (Chart) 847 

246. The Adequacy of the Customs Revenue System. R. F. 

Hoxie 847 

247. Some General Difficulties in Our State Systems of 

Taxation. E. R. A. Seligman 853 

248. A System of State and Local Taxes and their Appor- 

tionment. Minnesota Tax Commission . . . 855 

249. The General Property Tax. Special Committee, Inter- 

national Tax Association 860 

250. The Taxation of Intangible Personalty. Minnesota 

Tax Commission 862 

Commissioner of Corporations 864 

251. Taxation of Corporations. Commissioner of Corpora- 

tions 865 

252. The Inheritance Tax. C. J. Bullock 870 

253. The Income Tax in Wisconsin. Minnesota Tax Com- 

mission 874 

254. Separation of State and Local Revenues. Minnesota 

Tax Commission 880 

255. The Taxes on Land in Western Canada. Minnesota 

Tax Commission 883 

256. The Single-Tax Argument. C. B. Fillebrown . . 889 

257. The Land- Value Tax as a Social Reform. Fels Fund 

Publication 894 

XX. Some Programs of Social Reform 

258. Profit-Sharing in the N. 0. Nelson Manufacturing 

Company. N. 0. Nelson 898 

259. Profit-Sharing and Labor-Copartnership. T. C. Tay- 

lor 899 

260. A Promising Venture in Industrial Partnership. R. F. 

Foerster 901 

261. The Rochdale Plan of Co-operation. James Ford . 904 

262. Co-operative Creameries. James Ford 905 

263. Co-operative Stores. James Ford 907 

264. Causes of the Failure of Co-operative Stores in America. 

/. B. Cross 908 

265. Wastes in the Competitive Distribution of Milk . . 911 

266. Socialism. 0. D. Skelton 911 

267. The National Platform of the Socialist Party . . . 921 



I. INTRODUCTORY 

I. THE MALADJUSTMENT OF MAN AND NATURE' 

The question, Why do things have the power to satisfy wants ? 
would lead us back through physiology and psychology quite to 
the borders of the unknowable. The question, Why are they 
scarce? would lead us also toward the unknowable, but by a some- 
what different route. Into this philosophical hinterland of his 
science the economist has generally refrained from bursting lest 
he should be found poaching upon the preserves of the philosopher; 
but there are some things in this region which, when seen through 
the eyes of the economist, may come to have a new significance. 

Of course the first and most obvious reason for the scarcity of 
goods is that nature has not provided them in suflScient abundance 
to satisfy all the people who want them. Of some things, it is 
true, she is bounteous in her supply; but of others she is niggardly. 
Things which are so bountifully supplied as to satisfy all who 
want them do not figure as wealth, or economic goods, because 
we do not need to economize in their use. But things which are 
scantily supplied must be meted out and made to go as far as pos- 
sible. That is what it means to economize. Because we miist 
practice economy with respect to them they are called economic 
goods or wealth. In fact the whole economic system of society, the 
whole system of production, of valuation, of exchange, of distribu- 
tion, and of consumption, is concerned with this class of goods — 
toward increasing their supply and making the existing supply go 
as far as possible in the satisfaction of wants. 

The fact that there are human wants for whose satisfaction 
nature does not provide in sufficient abundance — in other words, 
the fact of scarcity — signifies that man is, to that extent at least, 
out of harmony with nature. The desire for fuel, clothing, and 
shelter grows out of the fact that the climate is more severe than 
our bodies are fitted to endure, and this alone argues a very con- 
siderable lack of harmony. The lack is only emphasized by the 
fact that it is necessary for us to labor and endure fatigue in order 
to provide ourselves with these means of protecting our bodies against 

• Adapted from T. N. Carver, "The Economic Basis of the Problem of Evil," 
in The Harvard Theological Review, I, 98 ff . (January, 1908.) 



2 MATERIALS FOR ELEMENTARY ECONOMICS 

the rigors of nature. That labor also which is expended in the pro- 
duction of food means nothing if not that there are more mouths to 
be fed, in certain regions at least, than nature has herself provided 
for. She must therefore be subjugated, and compelled to yield larger 
returns than she is willing to do of her own accord. And that expand- 
ing multitude of desires, appetites, and passions which drive us as 
with whips; which send us to the ends of the earth after gewgaws 
with which to bedeck our bodies, and after new means of tickling 
the five senses; which make us strive to outshine our neighbors, or 
at least not to be outshone by them — these even more than our 
normal wants show how widely we have fallen out of any natural 
harmony which may supposedly have existed in the past. 

That there is a deeper harmony lying hidden somewhere be- 
neath these glaring disharmonies is quite possible. Certainly no 
one can positively assert that it is not so. It may be true, as some 
profoundly believe, that these natural discomforts, with the necessity 
for work which accompanies them, furnish a discipline which is 
necessary for our highest good. Being thus driven by a vis a tergo 
toward our own highest good, we may be in harmony with our sur- 
roundings in ways which do not appear to our immediate sense of self- 
interest. But this whole question lies within the field of philosophical 
conjecture, and nothing positive can be affirmed on either side. 

Whatever our belief upon that point may be, there is not the 
slightest doubt that men are sometimes cold and hungry and sick; 
and that these discomforts would be much more frequent than they now 
are, if men did not work to prevent them. But work causes fatigue. 
Obviously the individual cannot be expected to see in this situation 
any sign of a complete harmony between himself and his material 
environment. So far as the individual can see and understand, the 
lack of harmony between himself and nature is a very real one. 

Viewed from this standpoint, the whole economic struggle becomes 
an effort to attain to a harmony which does not naturally exist. As 
is well known, the characteristic difference between the non-econo- 
mizing animals, on the one hand, and man, the economizer, on the 
other, is that in the process of adaptation the animals are passively 
adapted to their environment, whereas man assumes the active role 
in attempting to adapt his environment to himself. If the climate 
is cold, animals must develop fur or blubber; but man builds fires, 
constructs shelters, and manufactures clothing. If there are enemies 
to fight against, the animals must develop claws or fangs, horns or 



INTRODUCTORY 3 

hoofs, whereas man makes bows and arrows, or guns and ammunition. 
The whole evolutionary process, both passive and active, both bio- 
logical and economic, is a development away from less toward greater 
adaptation, from less toward greater harmony between the species 
and its environment. 

That phase of the disharmony between man and nature which 
takes the form of scarcity gives rise also to a disharmony between 
man and man. Where there is scarcity there will be two men wanting 
the same thing; and where two men want the same thing there is 
an antagonism of interests. Where there is an antagonism of interests 
between man and man there will be questions to be settled, questions 
of right and wrong, of justice and injustice; and these questions 
could not arise under any other condition. The antagonism of 
interests is, in other words, what gives rise to a moral problem, and 
it is, therefore, about the most fundamental fact in sociology and 
moral philosophy. 

This does not overlook the fact that there are many harmonies 
between man and man, as there are between man and nature. There 
may be innumerable cases where all human interests harmonize, 
but these give rise to no problem and therefore we do not need to 
concern ourselves with them. As already pointed out, there are 
many cases where man and nature are in complete harmony. There 
are things, for example, which nature furnishes in sufficient abundance 
to satisfy all our wants; but these also give rise to no problem. 
Toward these non-economic goods our habitual attitude is one of 
indifference or unconcern. Where the relations between man and 
nature are perfect, why should we concern ourselves about them? 
But the whole industrial world is bent on improving those relations 
where they are imperfect. Similarly with the relations between man 
and man; where they are perfect, that is, where interests are all 
harmonious, why should we concern ourselves about them? As a 
matter of fact we do not. But where they are imperfect, where 
interests are antagonistic and trouble is constantly arising, we are 
compelled to concern ourselves whether we want to or not. As a 
matter of fact, we do concern ourselves in various ways; we work out 
systems of moral philosophy and theories of justice, after much 
disputation; we establish tribunals where, in the midst of much 
wranghng, some of these theories are applied to the settlement of 
actual conflicts; we talk and argue interminably about the proper 
adjustment of antagonistic interests of various kinds, all of which, 



4 MATERIALS FOR ELEMENTARY ECONOMICS 

it must be remembered, grow out of the initial fact of scarcity — that 
there are not as many things as people want. 

Fundamentally, therefore, there are only two practical problems 
imposed upon us. The one is industrial and the other moral; the 
one has to do with the improvement of the relations between man 
and nature, and the other with the improvement of the relations 
between man and man. But these two primary problems are so 
inextricably intermingled, and they deal with such infinitely varying 
factors, that the secondary and tertiary problems are more than we 
can count. 

But whence arises that phase of the conflict with nature out of 
which grows the conflict between man and man? Is man in any 
way responsible for it, or is it due wholly to the harshness or the 
niggardliness of nature ? The fruitfulness of nature varies, of course, 
in different environments. But in any environment there are two 
conditions, for both of which man is in a measure responsible, and 
either of which will result in economic scarcity. One is the indefinite 
expansion of human wants, and the other is the multiplication of 
numbers. The well-known expansive power of human wants, con- 
tinually running beyond the power of nature to satisfy, has attracted 

the attention of moralists in all times and places Even 

if the wants of the individual never expanded at all, it is quite obvious 
that an indefinite increase in the number of individuals in any locality 
would, sooner or later, result in scarcity and bring them into conflict 
with nature, and therefore into conflict with one another. 

These considerations reveal a third form of conflict — ^perhaps it 
ought to be called the second — a conflict of interests within the 
individual himself. If the procreative and domestic instincts are 
.freely gratified, there will inevitably result a scarcity of means of 
satisfying other desires, however modest those desires may be, through 
the multiplication of numbers. Either horn of the dilemma leaves 
us with unsatisfied desires of one kind or another. We are therefore 
pulled in two directions, and this also is a condition from which there 
is no possible escape. But this is only one iUustration of the internal 
strife which tears the individual. The very fact of scarcity means 
necessarily that if one desire is satisfied it is at the expense of some 
other. What I spend for luxuries I cannot spend for necessaries; 
what I spend for clothing I cannot spend for food; and what I spend 
for one kind of food I cannot spend for some other. This is the 
situation which calls for economy, since to economize is merely to 



INTRODUCTORY 5 

choose what desires shall be gratified, knowing that certain others 
must, on that account, remain ungratified. Economy always and 
everywhere means a threefold conflict: a conflict between man and 
nature, between man and man, and between the different interests 
of the same man. 

In this antagonism of interests, growing out of scarcity, the 
institutions of property, of the family, and of the state, all have 
their common origin. No one, for example, thinks of claiming 
property in anything which exists in sufficient abundance for all. 
But when there is not enough to go around, each unit of the supply 
becomes a prize for somebody, and there would be a general scramble, 
did not society itself undertake to determine to whom each unit 
should belong. Possession, of course, is not property; but when 
society recognizes one's right to a thing, and undertakes to protect 
him in that right, that is property. Wherever society is sufficiently 
organized to recognize these rights and to afford them some measure 
of protection, there is a state; and there is a family wherever there 
is a small group within which the ties of blood and kinship are strong 
enough to overcome any natural rivalry and to create a unity of 
interests. This unity of economic interests within the group is 
sufficient to separate it from the rest of the world, or from other 
similar groups among which the natural rivalry of interests persists. 
Saying nothing of the barbaric notion that wives and children are 
themselves property, even in the higher types of society it is the 
desire to safeguard those to whom one is bound by ties of natural 
affection, by sharing the advantages of property with them, which 
furnishes the basis for the legal definition of the family group. 

Closely associated with the right of property — as parts of it in 
fact — is a group of rights such as that of contract, of transfer, of 
bequest, and a number of other things with which lawyers occupy 
themselves. It would be difficult to find any question in the whole 
science of jurisprudence, or of ethics, or politics, or any of the social 
sciences for that matter, which does not grow out of the initial fact 
of economic scarcity and the consequent antagonism of interests 
among men. This reveals, as nothing else can, the underlying unity 
of all the social sciences, that is, of all the sciences which have to do 
with the relations between man and man; and it shows very clearly 
that the unifying principle is an economic one. Even the so-called 
gregarious instinct may very probably be the product of the struggle 
for existence, which, in turn, is the product of scarcity — the advan- 



6 MATERIALS FOR ELEMENTARY ECONOMICS 

tage of acting in groups being the selective agency in the develop- 
ment of this instinct. But that question, like a great many others, 
lies beyond the field of positive knowledge. This does not necessarily 
constitute economics as the "master science," with the other social 
sciences subordinate to it; but it does signify that, if there is such a 
thing as a master science, economics has the first claim to that position 
among the social sciences. The economic problem is the fundamental 
one, out of which all other social and moral problems have grown. 

It would be interesting to follow up our conclusion with an exami- 
nation of the possibihties of escape from the situation which is imposed 
upon us by economic scarcity. Out of the view that the conflict of 
man with nature is a source of evil grow two widely different practical 
conclusions as to social conduct. If we assume that nature is benefi- 
cent and man at fault, the conclusion follows as a matter of course 
that desires must be curbed and brought into harmony with nature, 
which is closely akin to Stoicism, if it be not its very essence. But 
if, on the contrary, we assume that human nature is sound, then the 
only practical conclusion is that external nature must be coerced into 
harmony with man's desires and made to yield more and more for 
their satisfaction. This is the theory of the modern industrial spirit 
in its wild pursuit of wealth and luxury. Complete escape, by 
either of these methods, seems to be cut off, in the first place by the 
refusal of desires, especially the elementary ones, to be repressed, 
and, in the second place, by the utter impossibiUty of increasing goods 
to a point which will provide for every possible increase in population 
when population is unchecked by economic motives. If economic 
motives continue to operate as a check upon population, that is in 
itself an evidence of continued scarcity. But if they do not operate, 
and the procreative instincts are given free play, there is absolutely 
no limit to the increase of population. 

But even under the conditions of economic scarcity there would 
be no antagonism of interests between man and man if human nature 
were to undergo a change by which altruism were to replace egoism. 
If I could develop the capacity to enjoy food upon my neighbor's 
palate as well as upon my own, as I have already developed the 
capacity to enjoy it upon the palates of my children, and if my 
neighbor could develop a like regard for me, obviously there could 
be no antagonism of interests between us on the subject of food. 
Let this capacity become universal, and the moral problem would be 
solved. That would be the Christian's Millennium. Whether this 



INTRODUCTORY 7 

way of escape lies open or not, in other words, whether such a change 
in human nature is possible or not, is a problem for the psychologist 
or the religionist. That we may approach it indefinitely seems 
reasonable, but that it is ever attainable, either by the method of 
biological evolution or of evangelization, or by both combined, is 
by no means a foregone conclusion. It is certainly a long way off. 
Meanwhile what are we to do ? 

We may escape from some of the worst features of the situation 
by working along several lines at the same time. Every improve- 
ment in the arts of production, whereby a given quantity of labor 
is enabled to produce a larger quantity of the means of satisfying 
wants, tends, of course, in some degree to alleviate scarcity. If 
this can be supplemented by the doctrine of the simple life, made 
effective especially in the lives of the wealthier classes, so much 
the better; for then there will be fewer wants to satisfy. If this 
result can be still further strengthened by a rising sense of the respon- 
sibilities of parenthood, whereby the reckless spawning of population 
can be checked, especially among those classes who can least afford 
to spawn, the discrepancy between numbers and provisions will be 
kept at a minimum. Again, a more widespread spirit of altruism, 
or even a milder and more enlightened egoism such as that which 
moves the farmer to take delight in the sleek appearance of his horses, 
or the English landlord to take pride in the comfortable appearance 
of his tenants and cotters, would go a long way toward softening the 
antagonism of interests among men. 

In spite of all these methods, however, there will still be antago- 
nistic interests to be adjudicated. The state must therefore continue 
to administer justice. But every improvement in our conceptions 
of justice, as well as in the machinery for the administration of 
justice, whereby a closer approximation to exact justice may be 
secured, will make for social peace; though the mere adjudication 
of conflicting interests will not remove the conflicts themselves nor 
their cause. That hes deeper than legislatures or courts can probe. 

These conclusions sound commonplace enough, and are doubtless 
disappointing to those who hope for a new earth through some engine 
of social regeneration. The old world is already pegging away, and 
has been for a very long time, upon all the plans which have been 
mentioned in this paper. But after all, the old world is wise — 
much wiser than any man, though there are some men who think 
otherwise. 



MATERIALS FOR ELEMENTARY ECONOMICS 



Note. — Professor Carver has sometimes indicated the field of economics by 
means of the following diagram: 

/Passive adaptation in which man is passively adapted to 
his environment, e. g., by taking on fat in Arctic regions. 
The economist is not concerned with passive adaptation 



The attempt to secure 
a better adjustment 
of man and nature is 
a process of adapta- 
tion 



Active adaptation in 
which man adapts 
his environment to 
himself 



/Physical processes 
I. Production of \ 
II. Exchange of > 
III. Consumption of) 



Wealth and 
services 



Psychical processes (valuation) 
I. Valuation of material goods 

1 . Consumers' goods 

2. Producers' goods 

a) Land and natural agents 

b) Capital 

c) Laborers (where slavery 

exists) 
II. Valuation of services 

1 . Of land and natural agents 

(rent) 

2. Of capital (interest) 

3. Of laborers (wages) 

4. Of enterprisers (profits) 



2. MAN'S ADAPTATION OF HIS ENVIRONMENT' 

Man, and man alone of living creatures, neither submitted to the 
sentence of death pronounced by nature against all the creatures to 
whom she denied the means for continued existence, nor directed his 
efforts to alter his corporeal organization to suit murderous natural con- 
ditions. He made some alteration in his diet, took to eating meat 
instead of the fruits, roots, eggs, jelly- and shell-fish that were natural 
to him; but in essentials he remained unchanged. He did not grow 
a fur coat. On the contrary, he lost the covering of hair that had 
not been a protection against the cold so much as a means of strength- 
ening his skin and preserving it against insects, sunburn, and rain, 
and perhaps of adorning it. He did not harden himself to bid defi- 
ance to the open weather, after the fashion of the beasts of the fields 
and of the woods. He did not strain after the mane and claws of the 
lion, the iron muscle and compHcated digestion of the cud-chewing 
ox. On the contrary, he invented a mode of adjustment surpassing 
the ingenuity of any previous creature on the earth. Instead of 
altering himself, he directed his efforts to the alteration of external 
conditions. Instead of trying to fit his organism into an environment 

' From Nordau, The Interpretation of History, pp. 137-40. Moffat, Yard & 
Co., 1911. 



INTRODUCTORY 9 

that had become incompatible with his needs, he tried to adapt that 
environment to his organism and its needs. 

This new and pecuHarly human method of adjustment is still 
going on, and will probably never cease. It is incessantly becoming 
more delicate, skilful, and complete; all man's gifts are devoted to it; 
it is, as a matter of fact, the sole distinct meaning which the impartial 
observer can discern in the course of history; it determines all human 
events that are determined by the will of man rather than the order 
of nature. According to all biological laws, man should have disap- 
peared from the surface of the earth with the first Ice Age, just as 
every other living thing before him vanished so soon as the free gifts 
of nature no longer satisfied its organic needs. But he maintained 
himself in defiance of nature. Instead of submitting, he advanced 
resolutely to the combat. His survival is a rebellion against the sen- 
tence of death pronounced against him, and still valid Every- 
where, and at every hour, he has to wrest from nature the necessities 
of existence with his own hands. From birth to death he surrounds 
himself with artificial conditions; if he neglects them for a moment, 
his life is in imminent danger. His body has to be protected. In 
very warm climates, clothing, Hke tattooes and scars, the various 
ornaments in nose and lips, the hanging of trinkets round the neck, 
on breast and limbs, may have originated as a form of adornment and 
distinction ; but in colder latitudes the covering of the body was mainly 
due to the necessity of keeping warm. Man makes his supreme 
discovery, never surpassed or equalled — the kindling and keeping up 
of fire. With its aid he secures the degree of warmth helpful and 
agreeable to him, which the chemical action of his own cells cannot 
provide; by using fire in the preparation of his foods he simplifies 
digestion, and is enabled to extract nutriment of various natural 
kinds that he could not otherwise have enjoyed. Moreover, he 
acquires an instrument that spares much expenditure on muscular 
strength, and makes possible exertions that muscle alone could not 
have accomplished. Many animals whose absolute needs are satis- 
fied by nature need over and above a nest or shelter, and man most 
of all. He soon ceased to depend on the holes which he found ready 
made, and began to dig out or build up roofs and walls. In this way 
he secured, within his own small circle, that protection from the 
wind, that dryness and warmth, that the open air no longer afforded. 
He artificially created the cUmate that he thought suited him. With 
ever active inventiveness and ardent zeal, he wrested from his environ- 



lO 



MATERIALS FOR ELEMENTARY ECONOMICS 



ment everything that it denied him, which he could not as yet do 
without. His whole existence is as paradoxical as that of the diver in 
the depths of the sea. Destruction threatens it whenever one of the 
manifold precautions erected by man for his own preservation is 
disturbed. Goethe's Homunculus, who can only live in the retort 
in which he was created, and must instantly perish with the breaking 
of his glass, appears one of the most far-fetched and unreal creations 
of the poetic imagination. As a matter of fact, it is reality itself, a 
perfect symbol of the relations of man to nature. The artificial 
protections that inclose him are like the glass retort; if he emerge 
from them and stand, naked as he was born, face to face with nature, 
he must perish without hope, and descend to the fossils which once 
lived and flourished so long as nature permitted, and disappeared 
without a struggle when warmth and nourishment were withdrawn 
from them. 

. WAYS OF GETTING A LIVING^ 



\v\ 



I •■% C^' 



I. Uneconomical 



fWar 
Piracy 
Plunder 
Destructive { Swindling 

Counterfeiting 
Adulteration of goods 
Monopolizing 



Ways of 

Getting a 

Living 



2. Neutral 



Marrying wealth 
Inheriting wealth 
Benefiting through a rise 
in land values 



II. Economical 



f Farming 
I Mining 

1 . Primary industries { Hunting 

I Fishing 
[ Lumbering 

f Manufacturing 

2. Secondary industries \ Cforine 
[ Merchandising 



3. Personal or professional 
service 



Healing 
Teaching 
Inspiring 
Governing 
Amusing 
etc. 



' From T. N. Carver, Principles of Rural Economics, p. xx. Gimi & Co., 1911. 



INTRODUCTORY II 

4. COMPETITION AND THE INDUSTRIAL REVOLUTION' 

The contrast between the industrial England of 1760 and the 
industrial England of today is not only one of external conditions. 
Side by side with the revolution which the intervening century has 
effected in the methods and organization of production, there has 
taken place a change no less radical in men's economic principles 
and in the attitude of the state to individual enterprise. England 
in 1760 was still to a great extent under the mediaeval system of 
minute and manifold industrial regulations. That system was 
indeed decaying, but it had not yet been superseded by the modern 
principle of industrial freedom. To understand the origin of the \^ 
mediaeval, system we must go back to a time when the state was still \ 
conceived of as a religious institution with ends that embraced the 
whole of human life. In an age when it was deemed the duty of the 
state to watch over the individual citizen in all his relations, and pro- ' 
vide not only for his protection from force and fraud, but for his eternal 
welfare, it was but natural that it should attempt to insure a legal 
rate of interest, fair wages, honest wares. Things of vital importance 
to man's life were not to be left to chance or s el^ipter est to settle. 
"~~- — Eomo philosophy had as yet identified God and Nature.; no optimistic 
theory of the world had reconciled public and private interest. And 
at the same time, the smallness of the world and the community, and 
the comparative simplicity of the social system made the attempt to 
regulate the industrial relations of men less absurd than it would 
appear to us in the present day. 

This theory of the state, and the policy of regulation and restriction 
which sprang from it, still largely affected English industry at the 
time when Adam Smith wrote. There was, indeed, great freedom 
of internal trade; there were no provincial customs-barriers as in 
contemporary France and Prussia. Adam Smith singled out this 
fact as one of the main causes of English prosperity, and to Colbert 
and Stein, and other admirers of the English system, such freedom 
appeared as an ideal to be constantly striven after. But though 
internal trade was free for the passage of commodities, yet there still 
existed a network of restrictions on the mobility of labor and capital. 
By the law of apprenticeship no person could follow any trade till he 
had served his seven years. The operation of the law was limited, 
it is true, to trades already established in the fifth year of Elizabeth, 

' Adapted from Arnold Toynbee, The Industrial Revolution, chaps, vii and viii. 



12 MATERIALS FOR ELEMENTARY ECONOMICS 

and obtained only in market towns and cities. But wherever there 
was a municipal corporation, the restrictions which they imposed 
made it generally impossible for a man to work unless he was a free- 
man of the town, and this he could as a rule become only by serving 
his apprenticeship. Moreover, the corporations supervised the prices 
and qualities of wares. In the halls, where the smaller manufacturers 
sold their goods, all articles exposed for sale were inspected. The 
mediaeval idea still obtained that the state should guarantee the 
genuineness of wares; it was not left to the consumer to discover 
their quality. And in the Middle Ages, no doubt, when men used 
the same things from year to year, a proper supervision did secure 
good work. But with the expansion of trade it ceased to be effective. 
Sir Josiah Child already recognized that changes of fashion must 
prove fatal to it, and that a nation which intended to have the trade 
of the world must make articles of evei:y quality. Yet the belief in the 
necessity of regulation was slow in dying out, and fresh acts to secure 
it were passed as late as George II's reign 

The essence of the Industrial Revolution is the substitution of 
competition for the mediaeval regulations which had previously 
controlled the production and distribution of wealth. Competition, 
we-have-^ow learnt, is neither good nor evil in itself; it is a force 
which has to be studied and controlled; it may be compared to a 
stream whose strength and direction have to be observed, that 
embankments may be thrown up within which it may do its work 
harmlessly and beneficially. But at t-lie period w«-aje Gonsidering* 
it came to be believed in as a gospel, and, the idea of necessity being 
superadded, economic laws deduced from the assumption of universal 
unrestricted competition were converted into practical precepts, from 
which it was regarded as little short of immoral to depart. 

Coming to the facts of the Industrial Revolution, the first thing 
that strikes us is the far greater rapidity which marks the growth of 
population. Before 1751 the largest decennial increase, so far as 
we can calculate from our imperfect materials, was 3 per cent. For 
each of the next three decennial periods the increase was 6 per cent; 
then between 1781 and 1791 it was 9 per cent; between 1791 and 1801, 
II per cent; between 1801 and 181 1, 14 per cent; between 181 1 and 
1 82 1, 18 per cent. This is the highest figure ever reached in England, 
for since 181 5 a vast emigration has been always tending to moderate 
it; between 18 15 and 1880 over eight millions (including Irish) have 



INTRODUCTORY 13 

left our shores. But for this our normal rate of increase would be 
16 or 18 instead of 12 per cent in every decade. 

Next we notice the relative and positive decline in the agricultural 
population. In 181 1 it constituted 35 per cent of the whole popula- 
tion of Great Britain; in 1821, t,t, per cent; in 1831, 28 per cent. 
A.nd at the same time its actual numbers have decreased. In 1831 
there were 1,243,057 adult males employed in agriculture in Great 
Britain; in 1841 there were 1,207,989. In 1851 the whole number 
of persons engaged in agriculture in England was 2,084,153; in 
1861 it was 2,010,454, and in 1871 it was 1,657,138. Contempo- 
raneously with this change, the center of density of population has 
shifted from the Midlands to the North; there are at the present 
day 458 persons to the square mile in the counties north of the Trent, 
as against 312 south of the Trent. And we have lastly to remark 
the change in the relative population of England and Ireland. Of the 
total population of the three kingdoms, Ireland had in 1821 32 per cent, 
in 1881 only 14.6 per cent. 

An agrarian revolution plays as large part in the great industrial 
change of the end of the eighteenth century as does the revolution in 
manufacturing industries, to which attention is more usually directed. 
Our next inquiry must therefore be: What were the agricultural 
changes which led to this noticeable decrease in the rural population ? 
The three most effective causes were: the destruction of the common- 
field system of cultivation; the enclosure, on a large scale, of common 
and waste lands; and the consolidation of small farms into large. 
We have already seen that while between 17 10 and 1760 some 300,000 
acres were enclosed, between 1760 and 1843 nearly 7,000,000 under- 
went the same process. Closely connected with the enclosure sys- 
tem was the substitution of large for small farms. The process went 
on uninterruptedly into the present century. Cobbett, writing in 
1826, says: "In the parish of Burghclere one single farmer holds 
under Lord Carnarvon, as one farm, the lands that those now living 
remember to have formed fourteen farms, bringing up in a respectable 
way fourteen families." The consolidation of farms reduced the 
number of farmers, while the enclosures drove the laborers off the 
land, as it became impossible for them to exist without their rights of 
pasturage for sheep and geese on common lands. 

Severely, however, as these changes bore upon the rural' popula- 
tion, they wrought, without doubt, distinct improvement from an 



14 MATERIALS FOR ELEMENTARY ECONOMICS 

agricultural point of view. They meant the substitution of scientific 
for unscientific culture. "It has been found," says Laurence, "by 
long experience, that common or open fields are great hindrances to 
the public good, and to the honest improvement which every one might 
make of his own." Enclosures brought an extension of arable culti- 
vation and the tillage of inferior soils; and in small farms of 40 to 100 
acres, where the land was exhausted by repeated corn crops, the farm 
buildings of clay and mud walls and three-fourths of the estate often 
saturated with water, consolidation into farms of 100 to 500 acres 
meant rotation of crops, leases of nineteen years, and good farm build- 
ings. The period was one of great agricultural advance; the breed 
of cattle was improved, rotation of crops was generally introduced, 
the steam-plough was invented, agricultural societies were instituted. 
In one respect alone the change was injurious. In consequence of the 
high prices of corn which prevailed during the French war, some of 
the finest permanent pastures were broken up. Still, in spite of this, 
it was said in 1813 that during the previous ten years agricultural 
produce had increased by one-fourth, and this was an increase upon a 
great increase in the preceding generation. 

Passing to manufactures, we find here the all-prominent fact to 
be the substitution of the factory for the domestic system, the conse- 
quence of the mechanical discoveries of the time. Four great inven- 
tions altered the character of the cotton manufacture; the spinning- 
jenny, patented by Hargreaves in 1770; the water-frame, invented 
by Arkwright the year before; Crompton's mule introduced in 1779, 
and the self-acting mule, first invented by Kelly in 1792, but not 
brought into use till Roberts improved it in 1825. None of these 
by themselves would have revolutionized the industry. But in 1769 
— the year in which Napoleon and Wellington were born — James Watt 
took out his patent for the steam-engine. Sixteen years later it was 
applied to the cotton manufacture. In 1785 Boulton and Watt made 
an engine for a cotton-mill at Papplewick in Notts, and in the same 
year Arkwright's patent expired. These two facts taken together 
mark the introduction of the factory system. But the most famous 
invention of all, and the most fatal to domestic industry, the power- 
loom, though also patented by Cartwright in 1785, did not come into 
use for several years, and till the power-loom was introduced the 
workmail was hardly injured. At first, in fact, machinery raised the 
wages of spinners and weavers owing to the great prosperity it brought 
to the trade. In fifteen years the cotton trade trebled itself; from 



INTRODUCTORY 15 

1788 to 1803 has been called "its golden age"; for, before the power- 
loom but after the introduction of the mule and other mechanical 
improvements by which for the first time yarn sufficiently fine for 
muslin and a variety of other fabrics was spun, the demand became 
such that "old barns, carthouses, out-buildings of all descriptions 
were repaired, windows broke through the old blank walls, and all 
fitted up for loom-shops; new weavers' cottages with loom-shops 
arose in every direction, every family bringing home weekly from 40 
to 120 shillings per week." At a later date, the condition of the 
workman was very different. Meanwhile, the iron industry had been 
equally revolutionized by the invention of smelting by pit-coal brought 
into use between 1770 and 1750, and by the application in 1788 of the 
steam-engine to blast furnaces. In the eight years which followed 
this latter date, the amount of iron manufactured nearly doubled 
itself. 

A further growth of the factory system took place independent 
of machinery, and owed its origin to the expansion of trade, an 
expansion which was itself due to the great advance made at this 
time in the means of communication. The canal system was being 
rapidly developed throughout the country. In 1777 the Grand 
Trunk canal, 96 miles in length, connecting the Trent and Mersey, 
was finished; Hull and Liverpool were connected by one canal 
while another connected them both with Bristol; and in 1792, the 
Grand Junction canal, 90 miles in length, made a waterway from 
London through Oxford to the chief midland towns. Some years 
afterward, the roads were greatly improved under Telford and 
Macadam; between 1818 and 1829 more than a thousand additional 
miles of turnpike road were constructed; and the next year, 1830, 
saw the opening of the first railroad. These improved means of 
communication caused an extraordinary increase in commerce, and 
to secure a sufficient supply of goods it became the interest of the 
merchants to collect weavers around them in great numbers, to get 
looms together in a workshop, and to give out the warp themselves 
to the workpeople. To these latter this system meant a change from 
independence to dependence; at the beginning of the century the 
report of a committee asserts that the essential difference between 
the domestic and the factory system is, that in the latter the work is 
done "by persons who have no property in the goods they manu- 
facture." Another direct consequence of this expansion of trade was 
the regular recurrence of periods of over-production and of depression, 



1 6 MATERIALS FOR ELEMENTARY ECONOMICS 

a phenomenon quite unknown under the old system, and due to this 
new form of production on a large scale for a distant market. 

These altered conditions in the production of wealth necessarily 
involved an equal revolution in its distribution. In agriculture the 
prominent fact is an enormous rise in rents. Up to 1795, though 
they had risen in some places, in others they had been stationary since 
the Revolution. But between 1790 and 1833, according to Porter, 
they at least doubled. In Scotland, the rental of land, which in 1795 
had amounted to £2,000,000, had risen in 1815 to £5,278,685. A 
farm in Essex, which before 1793 had been rented at 105 an acre, was 
let in 181 2 at 505, though six years after, this had fallen again to 
35^. In Berks and Wilts, farms which in 1790 were let at 14s, were 
let in iSio.at jos, and in 1820 at 505. Much of this rise, doubtless, 
was due to money invested in improvements — the first Lord Leicester 
is said to have expended £400,000 on his property — but it was far 
more largely the effect of the enclosure system, of the consolidation 
of farms, and of the high price of corn during the French war. What- 
ever may have been its causes, however, it represented a great social 
revolution, a change in the balance of political power and in the 
relative position of classes. The farmers shared in the prosperity 
of the landlords; for many of them held their farms under beneficial 
leases, and made large profits by them. In consequence, their 
character completely changed; they ceased to work and live with 
their laborers, and became a distinct class. The high prices of the 
war time thoroughly demoralized them, for their wealth then increased 
so fast that they were at a loss what to do with it. Cobbett has 
described the change in their habits, the new food and furniture, the 
luxury and drinking, which were the consequences of more money 
coming into their hands than they knew how to spend. Meanwhile, 
the effect of all these agrarian changes upon the condition of the laborer 
was an exactly opposite and most disastrous one. He felt all the 
burden of high prices, while his wages were steadily falling, and he 
had lost his common-rights. It is from this period, viz., the beginning 
of the present century, that the alienation between farmer and 
laborer may be dated. 

Exactly analogous phenomena appeared in the manufacturing 
world. The new class of great capitalist employers made enormous 
fortunes, they took little or no part personally in the work of their 
factories, their hundreds of workmen were individually unknown 
to them; and as a consequence, the old relations between masters 



INTRODUCTORY I 7 

and men disappeared, and a "cash nexus" was substituted for the 
human tie. The workmen on their side resorted to combination, and 
trades unions began a fight which looked as if it were between 
mortal enemies rather than joint producers. The misery which 
came upon large sections of the working people at this epoch was 
often, though not always, due to a fall in wages, for, as I said above, 
in some industries they rose. But they suffered likewise from the 
conditions of labor under the factory system, from the rise of prices, 
especially from the high price of bread before the repeal of the corn- 
laws, and from those sudden fluctuations of trade, which, ever since 
production has been on a large scale, have exposed them to recurrent 
periods of bitter distress. The effects of the Industrial Revolution 
prove that free competition may produce wealth without producing 
.well-being. We all know the horrors that ensued in England before 
it was restrained by legislation and combination, 

5. EXCHANGE CO-OPERATION' 

It is the great multiplication of the productions of all the different 
arts, in consequence of the division of labor, which occasions, in a 
well-governed society, that universal opulence which extends itself to 
the lowest ranks of the people. Every workman has a great quantity 
of his own work to dispose of beyond what he himself has occasion 
for; and every other workman being exactly in the same situation, 
he is enabled to exchange a great quantity of his own goods for a 
great quantity, or, what comes to the same thing, for the price of a 
great quantity of theirs. He supplies them abundantly with what 
they have occasion for, and they accommodate him as amply with 
what he has occasion for, and a general plenty diffuses itself through 
all the different ranks of the society. 

Observe the accommodation of the most common artificer or day- 
laborer in a civilized and thriving country, and you will perceive 
that the number of people of whose industry a part, though but a 
small part, has been employed in procuring him this accommodation, 
exceeds all computation. The woolen coat, for example, which covers 
the day-laborer, as coarse and rough as it may appear, is the produce 
of the joint labor of a great multitude of workmen. The shepherd, 
the sorter of the wool, the wool-comber or carder, the dyer, the 
scribbler, the spinner, the weaver, the fuller, the dresser, with many 

• From Adam Smith, The Wealth of Nations, Book I, chap, i. 



l8 MATERIALS FOR ELEMENTARY ECONOMICS 

others, must all join their different arts in order to complete even this 
homely production. How many merchants and carriers, besides, 
must have been employed in transporting the materials from some of 
those workmen to others who often live in a very distant part of the 
country! How much commerce and navigation in particular, how 
many ship-builders, sailors, sail-makers, rope-makers, must have 
been employed in order to bring together the different drugs made 
use of by the dyer, which often come from the remotest corners of the 
world! What a variety of labor too is necessary in order to produce 
the tools of the meanest of those workmen! To say nothing of such 
complicated machines as the ship of the sailor, the mill of the fuller, 
or even the loom of the weaver, let us consider only what a variety 
of labor is requisite in order to form that very simple machine, the 
shears with which the shepherd clips the wool. The miner, the builder 
of the furnace for smelting the ore, the feller of the timber, the burner 
of the charcoal to be made use of in the smelting-house, the brick- 
maker, the bricklayer, the workmen who attend the furnace, the 
millwright, the forger, the smith, must all of them join their different 
arts in order to produce them. Were we to examine, in the same 
manner, all the different parts of his dress and household furniture, the 
coarse linen shirt which he wears next his skin, the shoes which cover 
his feet, the bed which he lies on, and all the different parts which 
compose it, the kitchen-grate at which he prepares his victuals, the 
coals which he makes use of for that purpose, dug from the bowels 
of the earth, and brought to him perhaps by a long sea and a long land 
carriage, all the other utensils of his kitchen, all the furniture of his 
table, the knives and forks, the earthen or pewter plates upon which 
he serves up_ and divides his victuals, the different hands employed 
in preparing his bread and his beer, the glass window which lets in the 
heat and the light, and keeps out the wind and the rain, with all the 
knowledge and art requisite for preparing that beautiful and happy 
invention, without which these northern parts of the world could scarce 
have afforded a very comfortable habitation, together with the tools 
of all the different workmen employed in producing those different con- 
veniencies; if we examine, I say, all these things, and consider what a 
variety of labor is employed about each of them, we shall be sensible 
that without the assistance and co-operation of many thousands, the 
very meanest person in a civilized country could not be provided, even 
according to, what we very falsely imagine, the easy and simple 



} 



INTRODUCTORY 1 9 

manner in which he is commonly accommodated. Compared, indeed, 
with the more extravagant luxury of the great, his accommodation 
must no doubt appear extremely simple and easy; and yet it may be 
true, perhaps, that the accommodation of an European prince does not 
always so much exceed that of an industrious and frugal peasant, as 
the accommodation of the latter exceeds that of many an African king, 
the absolute master of the lives and liberties of ten thousand naked 
savages. 



II. WANTS AND THE MEANS OF THEIR 
SATISFACTION 

6. A STUDY OF HUMAN WANTS 

A complete understanding of modern industrial society would 
obviously involve an understanding of its motive forces. Very likely 
we shall never know all the details of all the motive forces actuating 
society. Nevertheless, some few propositions seem reasonably clear 
and it is worth while to set these forth. 

We know that one of the basic social facts is the very common- 
place one that Nature does not spontaneously furnish means of satis- 
faction for all our wants, or even for most of them. We know that 
this fact serves largely to explain the struggles of man with nature 
and the struggles of man with man. It follows, accordingly, that 
a study of the characteristics of human wants should reveal many 
of the motive forces behind modern society. This field of study, 
enormous in extent and baffling in its elusiveness, clearly belongs to 
the psychologist. The economist can make no pretense of originality 
or comprehensiveness in dealing with such a subject. He must rest 
content with selecting a few propositions having significance for his 
purposes. 

I. There seems to he little or no cause to hope that the sum total of 
human wants will ever be sated. Hearn, in his Plutology, has discussed 
this matter at considerable length. 

"Food, drink, air, and warmth are the most urgent .... 

necessities These necessities man shares with all other 

animals He has also, beyond all other creatures, other 

faculties, which, besides their own requirements, seriously affect the 
gratification of the primary appetites; for man is able not merely to 
satisfy his primary wants, but to devise means for their better and 

more cornplete gratification He alone has cooked his food. 

He alone has infused his drink. He alone has discovered new kinds 
of food or drink. He alone has improved the construction of his 
dwelling, and has provided for its ventilation. He alone clothes his 
body, and varies that clothing according to the changes of tempera- 
ture or his own ideas of decoration. He alone is not content with the 
mere satisfaction, in whatever manner, of his physical wants, but 



WANTS AND MEANS OF SATISFACTION 21 

exercises a selection as to the mode of their satisfaction. So strong 
in him is this tendency to the adaptation of his means that, in favor- 
able circumstances, he regards the preparation of the objects which 
are intended for his gratification as of hardly less importance than the 
gratification itself. Thus the comparative range of human wants is 
rapidly increased. When the question of degree is admitted in the 
satisfaction of the primary appetites, and when the greater or less 
adaptability of various objects to satisfy these appetites is recognized, 
the extent of human desires is bounded only by the extent of human 
skill. 

"As the attempt to satisfy the primary appetites thus gives rise 
to new desires, so the actual increase of these desires tends of itself 
to a still further development. The enjoyment that a man has once 
received he generally desires to renew. The mere repetition soon 
becomes a reason for its further repetition. By the powerful influence 
of habit the desire becomes a taste, and the taste quickly passes into 
an absolute want. Nor is this all. The mere exercise of the faculties 
strengthens them, and gives rise to a comparison of results and a 
desire for further improvement. The man whose senses are educated 
to a certain point, who has had to a certain extent experience of 
different modes of satisfying his desires, and has formed a judgment 
upon the comparative efficiency of these modes, will seldom, in 
favorable circumstances, stop at that point. Not merely would a 
return to what pleased his untaught faculties be intolerable to him, 
but the actual enjoyment which he derives from his discovery stimu- 
lates him to further advances, and suggests the modes of obtaining 
them. Thus while man is not guided and limited by a blind instinct, 
but each individual is left free to rise or fall according to the exercise 
of his powers, provision is made, even in the primary wants of our 
nature, both to prevent the retrogression of the species and to secure 
its advancement. The number of wants that belongs to this class is 
therefore limited, as I have said, by our knowledge of the properties 
of matter or of material objects fitted to satisfy our wants, and by 
our skill in their adaptation. This knowledge and this skill continu- 
ally increase; and as the limit they present recedes, the range of our 
tastes and of our artificial wants increases with them. 

''There are other important respects in which human wants 
differ from those of the inferior animals. In addition to those 
primary appetites which he shares with the humblest living creature, 
and which relate exclusively to things, man has also, in a peculiar 



22 MATERIALS FOR ELEMENTARY ECONOMICS 

degree, affections which relate to persons; and various desires which 
are only conceivable with reference to abstractions, and result not 
from any physical antecedent but from operations of the mind. By 
the aid of memory, which recalls the past; and of imagination, which 
represents the distant, the absent, and the future; and of reason, 
which exercises a judgment upon the utility present or prospective 
of an object, and upon the means of obtaining it, man forms desires 
concerning his personal safety, his family, and his property. These 
desires, like those already described, become, by the force of habit, 
daily more persistent and intense. To this class of desires no limit 
can be assigned other than the mental powers of each individual. 
These wants, except those relating to the family, might arise in a 
man isolated from all other beings of the same kind. But man is by 
the constitution of his nature a social being. Beginning with the 
family, he soon forrhs relations with other men, and lives, and moves, 
and has his being in society. Hence arise new desires, each of which, 
like every other desire, is intensified and confirmed by habit. Man 
is imitative, and so seeks to have what his neighbor enjoys; he is vain, 
and so desires to display himself and his possessions with advantage 
before his fellows; he loves superiority, and so seeks to show some- 
thing that others have not; he dreads inferiority, and so seeks to 
possess what others also possess. Hence it is that, as daily experience 
teaches us, no man ever attains the state in which he has no wish 
ungratified. The greater the development of the mental and moral 
faculties, the greater will be the number of desires; the more con- 
tinuous the gratification of these desires, the more. confirmed will be 
the habit. 

"Not merely is the amount of human desire indefinite, but the 
modes in which desire in many different individuals is manifested 
are equally without any practical limit. Even in the primary appe- 
tites there is room for great diversity, according to differences of 
climate, age, sex, and other considerations, in the choice of food, and 
the construction of houses, and the fashion of clothes. In the desires 
which are peculiar to man we seldom find agreement. The diversity 
of individual tastes is proverbial. Two persons will often regard with 
very different feeling the same object. The same man will at different 
times and in different circumstances experience great changes in his 
desires and his aversions. 
^' "According, then, to the degree with which we are acquainted 
\ with external objects, and to the power that we possess of judging of 



WANTS AND MEANS OF SATISFACTION 



23 



their relations to ourselves and to other things, our capacity of desire /^ 
will be extended. It therefore depends upon the education, in the 
widest sense of that term, of each individual, and upon his character 
as mainly resulting from that education, how many and what kinds 
of objects, and with what degree of persistency, he desires. The 
more complete the intellectual development, the wider will be the 
field of desire; and, by the usual reaction in our mental nature, the 
wider the field of desire, the stronger will be the inducements to 
intellectual effort for the continuance of means to gratify these 
desires. 

"Nothing, therefore, can be further from the truth than the 
ascetic doctrine of the paucity and the brevity of human wants. So 
far from man wanting little here below, his wants are indefinite, and 
never cease to be so during his whole existence." 

Certain very obvious and very important consequences flow from 
the above-described characteristic of human wants. Here, in large 
part, lie the motives to acquisition and to progress. Here in 
large part, is the why of the endless variety and increasing struggle 
of our modern industrial society. 

2. Provided no change occurs in the consumer and provided time for 
physical recuperation from stimuli is not permitted, any single want is 
capable of being sated. As added units of the desired good are con- 
sumed, a continual diminution of satisfaction per unit occurs. Sooner 
or later the point of satiety is reached. Under the conditions here 
assumed the second unit of a good (say, an orange) gives less satis- 
faction than did the first ; the third gives less satisfaction than did 
the second, and so on to, and even beyond, the point of zero-satis- 
faction. In many texts this fact is illustrated by some such diagram 
as that in figure A where the diminishing heights of the successive 



,V-" 



















c 

c 


1 










A 


U1 


I 


2 


3 


4 


5 


6 


7 



Units consumed 



Units consumed 



24 



MATERIALS FOR ELEMENTARY ECONOMICS 



rectangles, from left to right, are supposed to represent the diminish- 
ing amounts of satisfaction derived from successive units of some good. 
In figure B, the same proposition is illustrated by a "curve of descend- 
ing utility,"^ instead of separate rectangles. 

Naturally, so far as we consciously distinguish the different 
intensities of different wants, we tend to satisfy our most pressing 
wants first and, equally naturally, we tend to apply our expenditures 
to all our wants in such a way as to secure equal marginal utility, 
so-called, from each. That is, we try to continue our consumption 
of no commodity so far that the last unit consumed affords less satis- 
faction than might have been secured by an equal expenditure for 
some other commodity. Here again an illustration serves us to good 
advantage. In the following table the Roman numerals I- VI denote 
six different commodities, in the order of their importance to a given 
consumer. The Arabic numerals indicate the intensity of satisfaction 
to be derived from the consumption of the first, second, third, or sub- 
sequent unit of each specified commodity. 







Commodity 




I 


II 


III 


IV 


V 


VI 


Satisfaction 


derived from ist unit consumed 


10 


9 


8 


7 


6 


,=; 


" 


" 2d " 


9 


8 


7 


6 


5 


4 


u 


" 3d " 


8 


7 


6 


5 


4 


3 


u 


" 4th " 


7 


6 


5 


4 


3 


2 


u 


" 5th " 


6 


5 


4 


3 


2 


I 


(1 


" 6th " 


5 


4 


3 


2 


I 





" 


" 7th " 


4 


3 


2 


I 







u 


" 8th " 


3 


2 


I 









u 


" 9th " 


2 


I 











u 


" lOth " 


I 













(I 


" nth " 
















Assume, now, that the same expenditure is necessary to secure 
any one unit of any commodity. If, then, a person is in a position 
to secure only a single unit, he will, under the stated conditions, pre- 
sumably take a unit of commodity I and derive a satisfaction of 10. 
However, if two units may be had, two units of I or one unit each of 
I and II offer equal satisfaction. A person choosing three units 
would select two units of I and one of II. The fourth unit to be 

' The term utility has here its conventional economic sense of capacity to 
satisfy want. 



WANTS AND MEANS OF SATISFACTION 25 

chosen might be, indifferently, a third unit of I, a second unit of II, 
or a unit of III — and so on. 

We must not permit the table to mislead us, however. It is a 
dangerous illustration in two or three particulars. If carried out to 
want X or XI it would seem to imply that the sum total of human 
wants could be sated, and this we know to be impossible. Again, 
if these figures were charted, the curve of descending utility would 
come down at the same angle for all wants. This is of course not the 
case in actual life. The curve of utility obviously descends more 
rapidly in the case of cook-stoves than in the case of slices of bread. 
Another way of stating this is to say that desire is more elastic in the 
case of slices of bread than in the case of cook-stoves. Finally, we 
must not suppose that anyone can really measure satisfactions in any 
such definite way as is here assumed in using the Arabic numerals. 
It must be kept in mind that an illustration is not a demonstration, 
and that a table or chart used to illustrate one feature of a subject 
may be a faulty illustration of another feature. 

What Consequences flow from the above statements? A few of 
the consequences are here listed and the student is asked to show 
how and why these consequences do flow. 

a) With an increased output of a given good its price tends to 
fall, other things remaining the same. 

b) If the output of several goods should be increased at the same 
rate the prices might fall at different rates. 

c) Diversity or variety of expenditure occurs. 

d) In part, here is an explanation of how it happens that a cer- 
tain amount of social energy is devoted to the production of good x 
and a certain other amount to the production of good y. In other 
words, here is part of the explanation of the distribution of land, 
labor, and capital among the various activities of society. 

3. The present estimation of the utility of a future good is less than 
the present estimation of the utility of a present good, assuming no change 
in either quantity or quality of the good. If you were asked whether 
you preferred to have a unit of x today or three years hence, under 
the conditions above assumed, your decision would be to receive it 
today. There are uncertainties in life; you might not live the three 
years; your wants might change; three years hence is a "long time 
off." Of course, if x is a bottle of grape juice, it might be preferred 
three years hence as wine, but in that case a change in quality has 
occurred. Equally, of course, if .t is now plentiful and you have 



26 



MATERIALS FOR ELEMENTARY ECONOMICS 



reason to know that x will be scarce three years hence, you might 
vote to defer present consumption, but in that case a change in 
quantity has occurred. 

The proposition here before us has been illustrated by the follow- 
ing diagram: 



Present Estimation of 
Future Good 







Present Estimation o 


f 




Present Good 


s 








3 






IH 








K 










a 






o 










Yi 










ca 












2 






C/2 














1 


2 


3 


4 


S 





Number of units 



Number of units 



If this proposition be true, should we have reason to expect that 
society might have occasion to induce some of its members to save 
by paying them interest on their savings ? 

4. Our wants are often imposed upon us by the force of imitation 
and by social standards. The gregarious instinct is powerful. We move 
in herds. We buy hats and clothing at Easter. We buy extensively 
at Christmas. Teddy bears become the rage and as suddenly are 
supplanted by some new fad. The tulip craze affects the industry of 
a whole country. And so examples without limit may be heaped up. 

The economist, however, is mainly interested in the economic 
consequences of these characteristics of our wants. Some of the 
consequences of this particular characteristic may be stated as follows : 

a) An explanation of the magnitude of some of our industrial 
phenomena. 

b) Great social saving through the economies of large scale pro- 
duction. 

c) Great social waste of machinery, goods, and established 
industrial and commercial connections when a shifting of taste occurs. 

d) A partial explanation of such phenomena as rush work, 
sweated industries, and overcrowding. 

e) A partial explanation of the growth of cities. 



WANTS AND MEANS OF SATISFACTION 27 

5. Our subjective estimate of satisfactions is continually shifting. 
I may have in mind such a table of satisfactions as was used under 2, 
above, and a word from you, an advertisement read, a look at a 
show window, or any one of a thousand other things, trivial or impor- 
tant, may change the table. With the lapse of time the case is even 
more striking. We change as a result of every factor of our environ- 
ment, by education, by travel, by association, even by the very process 
of consuming goods. 

Since industry caters to wants, it follows that there will be a 
continual shifting in industry and that a person engaged in supplying 
the means of satisfaction of these wants will assume risks and 
chances quite independent of the risks of climate, fire, or accident. 
It need not surprise us to find that men must be rewarded to induce 
them to incur these risks. 

In all the above, little was said concerning the why of wants. 
This is a problem for the psychologist rather than the economist. It 
is referred to at this point merely to emphasize the fact that the 
economist is making no arbitrary assumptions in this matter. Wants 
may be and are the results of instincts, reason, suggestion, habits, and 
a thousand other things. Be all that as it may, the significant thing 
for the economist is that the motivation of economic actions is to be 
found in wants. The purpose of this survey is solely to cause the 
student of economics to feel that the curtain has been pulled aside 
and that a view has been given of some of the real forces actuating 
industrial society. 

7. THE APPORTIONMENT OF EXPENDITURES' 

Dr. Ernst Engel, in 1857, compared the budgets in Le Play's 
famous ''Family Monographs," added data of his own, and formu- 
lated his schedule of the normal distribution of expenditures in their 
relation to income. 

From Table i (p. 28) Engel deduced four famous laws: 

1. The larger the income of a family, the smaller is the percentage 
of it expended for food. 

2. The percentage of expenditure for clothing remains approxi- 
mately the same for the larger incomes as for the smaller. 

3. With all the incomes investigated, the percentage of expendi- 
ture for rent, fuel, and light remains invariably the same. 

' Adapted from F. H. Streightoff , The Standard of Living among the Industrial 
People of America, pp. 12-23. Houghton MifHin Co., 1911. 



28 



MATERIALS FOR ELEMENTARY ECONOMICS 



Table I 

Engel's Table of Proportionate Expenditures 

The figures show for families with the stated incomes what percentage 

of total expenditure goes for each of the specified purposes. 



Object 



Subsistence 

Clothing 

Lodging 

Firing and lighting . . . 

Education, religion, etc 

Legal protection 

Care of health 

Comfort, recreation . . . 



$22S-$300 



62 
16 



95 



Family Income 



$4So-$6oo 



55' 
18 



3-5 
2 
2 
2.5 



90 



$7So-$i,ooo 



50' 
18 



5-5 
3 
3 
3-5 



8S 



15 



4. The larger the income, the larger is the percentage expended 
for education, health, recreation, amusement, etc. 

The brilliant work of this German statistician was confirmed in 
the main by the early work in America. The Massachusetts Labor 
Report for 1885, for instance, contained the schedule embodied in 
Table II. 

Table II 

Expenditures in Workingmen's Families in Massachusetts, 1885* 

The figures show for families with the stated incomes what percentage of total 

expenditure goes for each of the specified purposes. 





Family Income 


Object 


$300 
to 

$45° 


$45° 

to 
$600 


$600 
to 

$7SO 


$75° 

to 
$1,200 


Above 
$1,200 


Subsistence 


64 \ 

20 ^' 
6 
3 


63 ) 

'°-^ 95 
15.5 ^^ 

6 

5 


60 \ 
14 

6 
6 


56) 

17 y^ 

6/ 
6 


51 1 

5' 
10 


Clothing 

Rent 


Fuel.. 

Sundries 







* Sixteenth Report of the Bureau of Statistics of Labor, Massachusetts (1885), p. 152. 

It will be noticed that in 1885, in America, a larger share of 
income was absorbed by the subsistence wants, less being left for 
sundries — education, health, recreation, and amusements. Two other 
facts, however, are particularly significant: whereas the Belgian 
or German outlay for lodging remained constant at 12 per cent as 



WANTS AND MEANS OF SATISFACTION 



29 



the income increased, American rents fell from 20 per cent to 15 per 
cent of the expenditure; second, as they became more prosperous, 
Americans enlarged their relative expenditure for clothing. This 

Table III 

Expenditures in Workingmen's Families in Massachusetts, 1901* 

The figures show for families with the stated incomes what percentage of total 

expenditure goes for each of the specified purposes 



Object 



Subsistence 

Rent 

Clothing. . 

Fuel and lighting 

Education, church, etc, 
Health, insurance . . . . 
Sundries 



Total aver, expenditure.. 



Family Income 



Less 
than 

$450 



56. 
21.96 

915 
7.91 



$450 

to 

$600 



54-89 

17-54 

11.69 

6.91 



95.02 

1. 61 

2.98 

•39 



91-03 

2.92 
4.69 
1.36 



4.98 8.97 

^2.49 $555-53 



$600 
to 

$750 



53-30 

17.27 

11.68 

6-75 



39.00 

3-99 
3-98 
3 03 



$75° 
to 



Above 
$1,200 



53-18 

11.03 

14.66 

5-39 



54.87 
6.80 

14.62 
4-49 



84.26 

4. 12 
5.06 
6.56 



11.00 15-74 

$688.87 $886.50 



80.78 

4-58 

6.39 

8.25 



19. 22 

$1,252.59 



* Thirty-second Report of the Bureau of Statistics of Labor, Massachusetts (igoi), pp. 2Q6-97. 

might have indicated extraordinarily high rents in Massachusetts, 
or very great lack of good clothing in the lower income groups, or 
both. The condition in 1901, however, was much more favorable to 
the Massachusetts working people, as the proportion of expenditure 
devoted to existence wants had fallen in every income group from 
2 to 6 points, the gain being largely in reduced food costs. Still the 
expenses for clothing increased with the income, but not so exces- 
sively as in 1885; rents were still inordinately high, and the relative 
cost of lighting had begun to fall as income grew. (See Table III.) 
The Americans were by that time more liberal in their expenditures 
for health and insurance than were the Germans. 

Charts 1,== 11,^ and IIP form an epitome of the subject of budgets 

' Plotted from data on p. 55 of Mrs. L. B. More's Wage-Earner's Btidgels. 

' Plotted from data on p. 70 of R. C. Chapin's The Standard of Living in New 
York City. 

3 Plotted from data on p. loi or 585 of the Eighteenth Annual Report oj the 
United States Commissioner of Labor. 



3° 



MATERIALS FOR ELEMENTARY ECONOMICS 



as presented in the three studies mentioned in the note. It is inter- 
esting to observe that in no case does the expenditure for food reach 
51 per cent: in other words, American workingmen now find food a 
much less pressing claimant of their resources than did Engel's sub- 
jects, or even the people of Massachusetts, in 1885. Another inter- 
esting fact is that after the income of $600 is reached, the relative 
expensiveness of food wants diminishes rapidly in the United States as 
a whole, though in New York City there is little gain in that respect, 



Family Income: 

$200 $400 
to to 

400 500 



$500 
to 
600 



$600 
to 
700 



Chart I 



If 700 
to 
800 



jfSoo 
to 
900 



Ithgoo 

to 

1,000 



$1,000 

to 

1,200 



Si, 200 

to 

1,500 



Per cent of total expenditures made for various purposes by 200 
New York City families in relation to size of income 


FOOC 


y/^ 












.^ 




























^^^ 










^ 




^^^-- 


^^.-' 


Cior h i r^ 









— = 









Ltghtf Feet 










-- 















50% 

45% 
40% 
35% 
30% 
25% 
20% 

15% 

10% 

5% 

0% 



food there absorbing proportionately less of the low incomes and more 
of the high ones. Again, there is something sinister in the enormous 
excess of rent paid in New York City, especially by families of small 
resources. Whereas the average outlay for rent in the income group 
$4oo-$5oo in the city is $120 or $125, that in the country as a whole is 
$86.54. Dr. Chapin explains this phenomenon on the ground that 
exorbitantly high rents in the metropolis force people who live there 
to consider shelter almost their prime want. It is a peculiarity of 



WANTS AND MEANS OF SATISFACTION 



31 



New York City that, as their incomes grow larger, most families 
instead of seeking better quarters have to be content with a minimum 
of improvement in their houses, and are constrained to devote their 
additional resources largely to the purchase of food. It may be 
interesting to note that at the recent Berlin City Plan Exhibit it 
appeared that many families in the 1 200-1 500 marks income group in 
Schoneberg paid about one half their money for rent, and that the per- 
centage expenditure for housing falls off in the higher and lower groups. 

Chart II 
Family Income: 



$400 


$500 


$600 


$700 


$800 


$ 900 


$1,000 


$1,100 


$1,200 


to 


to 


to 


to 


to 


to 


to 


to 


to 


Soo 


600 


700 


800 


900 


1,000 


1,100 


1,200 


1,300 



Per cent of total expenditures made tor various purposes by 391 
New York City families in relation to size of income 




50% 
45% 
40% 
35% 
30% 
25% 
20% 

15% 

10% 

5% 

0% 



In general, as prosperity grows, clothing is awarded a constantly 
increasing proportion of income, though among the more well-to-do 
families, especially among those whose accounts were recorded in Dr. 
Chapin's tables, there is a slight decrease in the per cent of outlay 
for raiment. When a man is very poor, his first necessities are food 
and a safe place in which to sleep. After both of these wants have 
been supplied, he can devote his efforts to satisfying other desires. 
His hunger he can conceal; he can escape temporarily from squalid 



32 



MATERIALS FOR ELEMENTARY ECONOMICS 



home surroundings; but he cannot so easily rid himself of his rags — 

the badges of his poverty. So pride prompts him to secure better 

clothes as soon as his resources will permit him to do so. Fuel and 

lighting expenses slowly decline, and outlay for sundries rapidly rises 

in importance as incomes become more ample. 

Engel's laws, then, need considerable modification before they can 

be applied to American workingmen of the present time. On the basis 

Chart III 

Family Income: 

$900 $1,000 $1,100 Over 

to to to 

1,000 1,100 1,200 $1,200 



Under 


$200 


$300 


$400 


$500 


$600 


$700 


$800 




to 


to 


to 


to 


to 


to 


to 


$200 


300 


400 


500 


600 


700 


800 


900 



Per cent of total expenditures made for various purposes by 1 1 , 1 56 normal 
families throughout the United States in relation to size of income 




50% 
45% 
40% 
.35% 
30% 

25% 

20% 

15% 

10% 

5% 

0% 



of the special investigations here cited they may be tentatively restated 
thus: 
J^ As the income increases: 

1. The proportionate expenditure for food 

a) decreases for the country at large from 50 per cent to 37 

per cent, but 
h) in New York City, it amounts to almost 45 per cent of the 

total outlay until an income of $1,000 is attained. 

2. There is a strong tendency for the percentage of expenditure for 

clothing to increase. 



WANTS AND MEANS OF SATISFACTION 33 

3. Relative expenditures for housing 

a) remain about constant for the country at large, falling very 
sHghtly after $400 incomes have been reached, but 

h) decrease rapidly from 30 per cent, or more, to 16 per cent 
in New York City. 

4. Proportionate expenditures for fuel and light decrease. 

5. Expenditure for culture wants increases absolutely and rela- 

tively. 

8. THE STANDARD OF LIVING' 

Satisfactorily to define the standard of living is extremely difficult. 
Professor Charles J. Bullock, for instance, writes: "Each class of 
people in any society is accustomed to enjoy a greater or less amount 
of the comforts or luxuries of life. The amount of comforts or 
luxuries customarily enjoyed by any class of men forms the ' standard 
of living' of that class." That is to say, the standard of living, as the 
expression is usually understood, consists simply of what men actually 
do enjoy. On the other hand, there always are felt but unsated wants 
that prompt men to struggle for higher wages; these reasonable 
unfilled desires are the motive power of progress. Few indeed are 
the women who do not confidentially whisper to their friends: "We 
cannot do that now, for we are rather poor this year." An inborn 
spirit of emulation prompts each to envy the pleasures of his more 
fortunate neighbor; thus there is an "ideal" standard of living which 
is always in advance of achieved satisfaction. 

Professor Bullock's definition is particularly valuable in suggest- 
ing two important truths. First, it properly emphasizes comforts and 
luxuries. "If we are to judge by his expenditure, the workingman 
may graduate his wants thus: bread and meal, house, liquor, tea, 
tobacco, clothes, meat." The fact is that in everyday affairs effort 
is often directed more to securing superfluities than to providing 
necessities: for example, it is said on good authority that a large 
percentage of recent real estate mortgages in New York have been 
given that the owners of the property might purchase automobiles. 
In the second place, the extent and content of the unsated wants in a 
man's ideal standard is largely determined by actual satisfactions. 
This truth is emphasized by Mr. Frank Tucker when he says: "A 
standard of living is a measurement of life expressed in a daily routine 

' From F. H. Streightoff, The Standard of Living among the Industrial People 
of America, pp. 2-8. Houghton Mifl9in Co., 191 1. 



34 MATERIALS FOR ELEMENTARY ECONOMICS 

which is determined by income and conditions under which it is 
earned, economic and social environment, and the capacity for 
distributing the income." 

Having noted these fundamental principles, it is possible to take 
another step. Each individual has his own more or less rational 
concept of what is essential to the maintenance of his own social 
position; and he knows exactly what this position is, whether he be 
the bank clerk who delights in horse-races, or the man who shares the 
same desk and plays on his Sunday-school ball team. The one de- 
mands "smart" raiment and amusement at high nervous tension, the 
other wants respectable, serviceable clothes and healthy sport. They 
live in different worlds, they have individual criteria: so each man 
has his own standard of living. But it will be noted that the bank 
clerks as a class have some wants in common in contrast to the 
mechanics, for instance. The clerks must enter their ofl&ces clean- 
shaven, the mechanics like a good scrub after work; the former wear 
kid gloves and fresh linen, the latter are more comfortable in woolen 
gloves and flannel shirts. These contrasts and comparisons can be 
extended until the standards of each group have been determined with 
considerable precision. Thus the class standard of living may be 
compared to a composite photograph; certain features are empha- 
sized, while others are faint or blurred according to the proportion of 
individuals possessing the character — or feeling the want. On the 
other hand, development of the individual is so largely influenced by 
his environment that his notions are, in the main, those of his class. 
So the class standard of living is the product of the ideals and resources 
of its members, and, in turn, modifies their criteria. 

But class is not the only -factor within the community in the 
development of the individual's ideal standard of living. Aside from 
its large determining influence in the matter of class membership, 
income has an important part to play; purchasing power limits the 
quaUty and quantity of obtainable satisfactions. As little Tommy 
wants to be like Big Brother, and Big Brother envies the prowess of 
the butcher-boy, so the smelting hand feels the desires — ^not of the 
president of the Steel Trust — but, say, of his foreman, the nearest 
person whom he sees enjoying just a little more distinction, just a 
little more material wealth than he. So the individual's ideal is 
limited by his income; the higher he climbs on the ladder of success, 
the wider is his view; the more he sees, the more he seeks. 

Another determinant of the standard of living is the progress of 



WANTS AND MEANS OF SATISFACTION 35 

civilization. Professor John G. Brooks quotes a Cape Cod captain 
as follows: "My father wanted fifteen things. He didn't get 'em all. 
He got ten and worried considerable because he didn't get the other 
five. Now I want forty things, and I get thirty, but I worry more 
about the ten that I cannot get than the ole man used to about the 
five he couldn't get." The modern carpenter has far more comfort 
than Richard II dreamed of, simply because progress has put new 
things within his reach — created new utilities and new wants — but 
the carpenter knows that there are many, many things that he cannot 
have. Thus there is a constant, though irregular, rise of the standard 
of living as civilization becomes more complex. The standard, then, 
is a result of two forces, environment, comprising time, income, and 
class, and individuality. 

It will not do, however, to leave the problem at this point. As 
the standard determines the manner of living, it is important to 
distinguish between worthy and unworthy, or high and low standards. 
It may reasonably be doubted whether the standards of the very rich 
are ideally any higher than those of industrial workers. A dinner 
given by one of the exclusive four hundred with a monkey as the 
guest of honor is no more justifiable than the practice of the "wash- 
lady" who displays the gold fillings in her false teeth. Both are 
useless, if not positively harmful ; they are evidence of low or unworthy 
ideals. A normal standard of living, on the other hand, is one which 
conduces to healthy symmetrical development, physical, mental, and 
moral. The standard is properly counted ideally high in proportion 
as it achieves this end, and especially as its emphasis falls upon the 
intellectual and moral elements. 

What, then, is the content of the lowest tolerable standard of 
living? In the first place, there must be food, clothing, and shelter 
sufficient to maintain economic efficiency. Even those persons who 
believe that the sole end of existence is production must grant this 
proposition, at least in its general application. Under shelter is 
included light, fuel, and necessary furniture. If economic efficiency 
is to be preserved, there must be provision against sickness and un- 
employment; for, unless his strength is maintained during idleness, 
when he returns to work the individual is unfit for his stint. More- 
over, the man's standard must include a family, else, in a generation, 
production will cease. 

But this view of the purpose of man is far too narrow. Few 
people would today have the hardihood to deny that man's life should 



36 MATERIALS FOR ELEMENTARY ECONOMICS 

contain the largest possible amounts of wholesome pleasure. "One 
of the strongest human wants is the desire for the society of one's 
fellows." This means that with a normal standard of living the house 
should contain a room fit for entertainment of company, that the 
family should have clothes which will enable them to appear in public 
without shame, and that the routine should include some leisure for 
polite intercourse. Still if man is to be an end in himself he must 
have more than this; he needs some education, books, pictures, and 
wholesome recreation; he must have time for the home life that 
Colonel Roosevelt calls "the highest and finest product of our civili- 
zation." A little boy once defined home as "the place where mother 
is." From the viewpoint of the child's welfare, this youngster 
undoubtedly hit upon the significant fact. Modern scientific charity 
as well as the Christian religion recognizes a very real social value in 
the home. It is probably this which is in the mind of Professor John 
A. Ryan when he writes that the wife should not be a wage-earner, 
thus implying that the father should support the family. Beside 
all these things, a normal standard of living contains provision for all 
emergencies, sickness, accident, unemployment, and death, and for 
material advance — savings: religion, too, should be in the routine. 
So the ideal standard of living demands the satisfaction of reasonable 
wants of both body and intellect, and includes an ambition to improve. 
A clear understanding of what the standard of living is permits 
some appreciation of its significance. In the first place, unless the 
standard includes adequate food, clothing, and shelter, health will 
inevitably suffer and the race will degenerate physically. If, on the 
contrary, men obtain a proper satisfaction of these fundamental wants, 
not only will health be preserved and improved, but a foundation 
will be laid for intelle(;tual progress. A step farther may be taken 
along this line : unless they believe that their descendants will be able 
to maintain the parental standard, men will, if thoughtful, refuse to 
become fathers. Again, if women would rather dress showily than 
enjoy homes of their own, married or unmarried, they will refuse to 
assume the burden of motherhood. Thus, in two distinct ways, the 
standard of living tends to determine population. By this limiting of 
propagation, the standard of living limits the number of wage-workers, 
and so, if high enough, it can change the ratio of supply to demand 
for labor and thus raise compensation. In a much more simple and 
direct way, however, the desire for a higher standard of living decides 
the minimum pay demanded by trades unions and operates to increase 



WANTS AND MEANS OF SATISFACTION 37 

earnings. More satisfactions will breed new wants, yet higher wages 
will be sought, and so the process will continue. In this way the 
"ideal" standard of living is the key to the material progress of the 
industrial classes. 

Moreover, "in most cases increased wages have meant the grati- 
fication of the intellectual and artistic sense of the workers; have 
meant books and pictures; have meant a few extra rooms in the 
house and more decent surroundings generally; have meant a few 
years extra schooling for the children; have meant, finally, a 
general uplifting of the whole working-class." "The encouraging 
part of the whole matter is this, that among the poor there is 
everywhere the intensity of purpose that causes them to give up 
material things, food and raiment, and go hungry and shabby, in 
order to secure the spiritual things, amusement, education, and social 
relationship." The pursuit of a higher standard of living is, then, the 
inspiration of intellectual advance; upon it depends the physical and 
mental and moral welfare of the people, the development of the 
commonwealth. Two things, therefore, are essential to the progress 
of a nation: first, that the individuals receive so much material 
wealth as will enable them to satisfy their reasonable wants, and, 
second, that they continually discover new and wholesome desires. 

9. A NORMAL STANDARD OF LIVING' 

Writers on social questions have occasionally assumed certain 
round sums as the cost of maintaining a normal standard of living. 
For instance, Edward T. Devine, in Principles of Relief , 1904, p. 35, 
says: 

Recognizing the tentative character of such an estimate, it may be 
worth while to record the opinion that in New York City, where rentals and 
provisions are perhaps more expensive than in any other large city, for an 
average family of five persons the minimum income on which it is practi- 
cable to remain self-supporting and maintain any approach to a decent 
standard of living is $600 a year. 

Professor Albion W. Small, head of the department of sociology 
in the University of Chicago, is quoted as having said in a lecture: 

No man can live, bring up a family, and enjoy the ordinary human 
happiness on a wage of less than $1,000 a year. 

' Adapted from the Report of the [Massachusetts Commission on the Cost of 
Living (1910), pp. 594-97- 



38 



MATERIALS FOR ELEMENTARY ECONOMICS 



John Mitchell, formerly vice-president of the American Federation 
of Labor, has said that the minimum wage that will maintain a working- 
man and his family according to the ' 'American standard ' ' is $600 a year. 

None of these estimates gives us any of the details from which the 
generalization has been arrived at, and none, except that of Dr. 
Devine, gives imit and locality. It is evident that the minimum 
income necessary to maintain a normal standard of living will vary 
considerably in different places, because of the differences in living 
conditions, prices, wages, rents, social life, opportunities for recreation, 
etc. As conditions in the same locality are changing from year to year, 
it would also be necessary to revise such an estimate from time to time. 

The New York State Conference of Charities and Correction 
undertook an investigation of the cost of a normal standard of living 
in New York City in 1907. This investigation was in great detail, 
and was based upon 318 budgets. 

For the report 224 family budgets were selected from the 318 that 
were available. The income of these families ranged between $600 
and $900. The average incomes and disbursements of the three 
groups are shown in the table. 

Average Income and Expenditure* 



Items of Expenditure 



Group I, 

Income, 

$6oo-$699; 

Average, $650 



Group II, 
Income, 

$70o-$799; 
Average, $748 



Group III, 

Income, 

$8oo-$899; 

Average, $846 



Rent 

Carfare 

Fuel and light 

Furniture 

Insurance 

Food 

Meals eaten away from home . 

Clothing 

Health 

Taxes, dues and contributions . 
Recreation and amusement . . . 

Education 

Miscellaneous 



Totals. 



5154 

II 

38 

6 

13 
279 
II 
83 
14 
8 

3 

5 

25 



$161 
10 

37 

8 

18 

314 

22 

99 

14 

9 

6 

5 
32 



16 

41 

7 

18 

341 

18 

114 



7 

7 

41 



$735 



* Report of Special Committee on Standard of Living in New York City. 

Group I. Income $6oo-$yoo. — Do the families with incomes 
from $600 to $700 maintain a standard of living sufficient to preserve 
physical and mental efficiency ? The average family of five persons 
in this group pays $13 a month for rent, for which they are able to 
obtain in the Borough of Manhattan from 2 to 3 rooms. The rooms 



WANTS AND MEANS OF SATISFACTION 39 

are apt to be low and comparatively small, and one room is usually 
dark. The food disbursement for such a family is approximately 
$270 a year for five individuals, or a 3 . 5 unit. This is $82 a year per 
unit, or 22^ cents per man a day. In reckoning the consumption of 
food, the proportionate amounts assigned to each person, as compared 
with the requirements, for an adult man are expressed by i; adult 
woman, .8; children, .3 to .7, depending upon the age. The family 
clothes itself at a cost of $84 a year. It is difficult to determine 
whether a family of five can buy enough clothing for their needs on 
$84 a year. FamiUes in this group often receive gifts of clothing from 
relatives, employers and friends. 

A family having an income of $650 a year spends 24 per cent of 
its income for rent, 45 per cent for food, or 85 per cent for four items, 
rent, food, clothing, fuel and light. Only 2 . 5 per cent is spent for 
education, recreation and dues to societies; the other 12.5 per cent 
is for health, insurance, furniture, carfares, meals away from home 
and miscellaneous. The family is unable to make any provision 
against accident, or to lay by anything for a rainy day. Twenty of 
the 72 families in this group admitted being in debt, thus showing 
how difficult it is to live within this income. The committee con- 
cluded that an income between $600 and $700 per annum was insuffi- 
cient for a family of five to maintain a proper standard of living in the 
Borough of Manhattan. Leaving aside the exceptions, it is apparent 
that many families in this group have a fierce struggle for existence. 
The maximum of food bought approximates the minimum set up by 
authorities on this subject. No provision can be made for accidents 
or emergencies. If either of these occur, the family runs into debt. 
Were it ndt for the charity of friends, relatives, employers or philan- 
thropic organizations, the expenditures of the family would be larger 
than the income. Such a family literally lives a hand-to-mouth 
existence, with neither opportunity nor means for enjoyment or 
recreation. The health of its members cannot be safeguarded from 
its own resources. The housing accommodations barely prevent 
overcrowding. The committee states: 

It requires no citation of elaborate statistics to bring convincing proof 
that $600 to $700 is wholly inadequate to maintain a proper standard of 
living, and no self-respecting family should be asked or expected to live on 
such an income. 

Group II. Income $'/oo-$8oo. — The average expenditure for this 
group was $735 — $85 more than in Group I — to be accounted for as 
follows: $45 more for food, $16 more for clothing, the balance of $24 



40 MATERIALS FOR ELEMENTARY ECONOMICS 

fairly evenly distributed among the other items of the budgets. All 
of the 79 families in this group lived within their incomes. The 
housing conditions remain practically the same. In the food budget 
the $45 additional permits of more animal food and a better quality. 
The per capita per day is increased to 25 cents. All in all there is a 
tendency toward improvement in condition, and were it not that 
housing conditions have not improved, it might be assimied that the 
family is beginning to reach a point where a fairly decent standard 
of living is to be maintained. The committee finds: 

The committee believes that with an income of between $700 and $800 
a family can barely support itself, provided that it is subject to no extraor- 
dinary expenditures by reason of sickness, death or other untoward circum- 
stances. Such a family can live without charitable assistance through 
exceptional management and in the absence of emergencies. 

Group III. Income $8oo-$goo. — The average expenditure for the 
families of this group is $811. The average income is $846. There 
is thus an average annual saving of $35 per family — in marked con- 
trast with the experience of the groups with lower incomes. There 
is an increase of $76 in expenditures over Group II, of which 50 per 
cent goes for food and clothing, 10 per cent for rent, 15 per cent for 
miscellaneous, and 25 per cent for other items. The housing is better. 
There are more baths and particularly more toilets in the apartments. 
The rooms are larger, with more light. The amount that is now dis- 
bursed for food (27 cents a day) and for clothing appears to be 
adequate. The people have opportunities for recreation and for 
amusement that are fairly normal. The committee sums up : 

In view of all these facts, the committee is of opinion that it is fairly 
conservative in its estimate that $825 is sufficient for the average family 
of five individuals, comprising the father, mother and three children under 
fourteen years of age, to maintain a fairly proper standard of living in the 
Borough of Manhattan. 

It is interesting to observe that Mrs. More's study, based upon 
200 families in New York City, reaches conclusions as to the minimum 
income necessary to maintain a normal standard of living which are 
very similar to the conclusions of the State Conference of Charities. 
She says (p. 269): 

This investigation has shown that a well-nourished family of five in a 
city neighborhood needed at least $6 a week for food. The average for 39 
families having five in a family was $327 . 24 a year for food. If we consider 
$6 a week (or $312 a year) as 43 . 4 per cent of the total expenditures (which 



WANTS AND MEANS OF SATISFACTION 



41 



was the average expended for food in these 200 families, and very near the 
average for the workingmen's families in the extensive investigation of the 
Department of Labor), the total expenditures would be about $720 a year. 
It therefore seems a conservative conclusion to draw from this study that 
a fair living wage for a workingman's family of average size in New York 
City should be at least $728 a year, or a steady income of $14 a week. 
Making allowance for a larger proportion of surplus than was found in these 
families, which is necessary in order to provide adequately for the future, 
the income should be somewhat larger than this — that is, from $800 to 
$900 a year. 



Useful 
things 
or 
goods 



A CLASSIFICATION OF THE MEANS OF SATISFYING 






WANTS 


' 


Free goods, 








not the objects 






ot economic 








endeavor, 








hence non- 








economic goods 








Land and 








natural 








resources 






Scarce 








goods, the 








objects of 








economic 






Consumed by 


endeavor. 






their owners 


hence eco- 








nomic goods 




Consumers' ■ 


Loaned, rented, 


or wealth* 


Produced 
goods 


goods 

Producers' _ 
goods 


or hired by Private or ^ 
their owners = acquisitive 
Jor an income capital 

Social or 
productive capital 


■Ca 



' From T. N. Carver, Principles of Rural Economics, p. 203. Ginn & Co., 
1911. 

* Though, in an absolute sense, well-being depends upon free goods quite as 
much as upon scarce goods, yet in a relative and practical sense it does not. 
Where air, water, sunlight, etc., are abundant and free, our well-being is not 
improved by getting more of these things, and we cannot count ourselves as 
possessing more wealth when we increase our possession of them. But when they 
are scarce, our economic efforts are directed toward getting more of them, or sub- 
stitutes for them. By such efforts our well-being is improved. Such things are 
therefore properly called wealth, because our well-being depends upon them in this 
relative, immediate, and practical sense. Here, as frequently happens elsewhere, 
the general common sense of mankind, which sanctions this use of the word 
"wealth," shows more wisdom than the hasty judgment of the partially trained 
thinker who rejects this usage and insists that wealth should include free goods 
as well. 



42 



MATERIALS FOR ELEMENTARY ECONOMICS 



H 

W 

o 
>^ 

H 
P^ 
W 
P-i 
O 

P!5 

Ph 

Q 
'^ 

w 
w 
m 

W 
H 

o 

w 
u 

H 
I— I 

W 

w 

w 

H 

O 

'^ 
I— I 
H 
< 

H 

CO 

I— I 

en 
W 

CO 

U 

< 

u 

I— I 

p-i 



o< 



^ ii 



Q«< 



o 



IS -g i^5 -§ iJ s 

h3 ;?; p:; H^ pq Jz; Iz; 






>>'0 "C 






•ti _^ s 






|4 cd 






bO 



o F SIS a 



D O 



PilO 



<U IH >-' 



3 O <u oj 
O h y ir! O 



C! n c! c p 
? 3 g g u 



C O 
03 tn 






a, 






o^ 



>H IH ^^ 



-a 53 



W) 


a 


U 


u 




J3 








iJ >> 




:3.*i 


o 


o3 CtS 


+J 


-r. 3 fl 


c 

8 


11 d 

1 sec 
ema 




_ tSTS 


§ 





rl -^ 4> 



4) a 4> 

So a 



H «+H M-( M-l *+H O O M^ »-»-( -S '—2 Q Q M-l U C 






o 

I- 

cS.SP 

p^« 



in bO-i_> 60 M W 



rt-a 



p^Pi ;A ^ ^ 



"? « 



^. 


in 




U5 "<^ 


rt 

s 


1^ 








be bD 




bOM 


s 


Ci C 




C fl 


.u 


^T^ 


^ 


-o^ 


E! 








<u <u 














m 


» 




>^? 






S u <" 

"^^1^ bC 

^ " S5 <" -c 

p t) p 



o I fi ^ 



152 C 



■u . 



<u 



Ph P^ 



I 

Ph 



■wpQ 
A in 

^ bo 

§2 



feO 



P^P^ 



3 

(A 

Jrf 3 








>^ 








bC 








be 








s 








^ 








-d 




3 


bc 

C 


3 

o5 





^P 


1 





15 

(U 




Q 


K 


H 



"o -coo. 

5S ^ = 2 

g "^ 0, 

■| M'^ 3 

oj 3 <u c« 

[^ sg ^-^ 

O 3:3_ bo 



:3 -^-3 
P^ < 



M 



p; 



'■3 _ 
P^^ 



3 lU 



WANTS And means of satisfaction 



43 











































tn"ii tn" 






*J 




































■y^ d 






B. 




































^ d o 






i 




































a""*: 








































— oj 










































•O (J 






1 








^ 








T3 
O 






















^ 




o 








d 
o 
























<u 




2& 


§ 




« 

^ 








s 
























ya 




Ih ^^^^ 
_^ 03 tn 


U3 

5§ 






d 

o 








'tj 












o3 

J3 






V 

d 
o 




I-I 




•G22 SJ 


^1 




< 


^ 






Ph 


o 






o 






o 






^ 




U 




o 








"o 


































^ 








8 


































•^ 

^ 








a 


































o 








c<3 


























(J 








43 








































^ 


















































o 






« 




















o 








73 








ki 






6 

OS 


u 






u 






w 






o 








03 


-a 












m 

d 
.2 


i 






a 












■M 

d 




(0 

a 




ii 
> 


c 
o 




V 


4> 

d 




en 

a 






tn 

Oh 






tn 






a 

d 

Ul 




c3 
tn 

"o 




O 


S 




B 


X3 


2 




ti 


S 






a 






a 






> 




4) 




"3 


03 




a 








o 


o 






o 






o 






O 




tn 




tn 




en 




rt 




a 


u 






(J 






o 






bo 




3 




2i 


O 




O 


"o 


a, 




o 


o 






o 






o 






t« 




O 




■*-> 




■4^ 


ui 












*J 






■t-l 






o 




*^ 




tn 


■4-1 




.4.} 


-!-> 


Ci 




*j 


4J 






•i~i 






■u 






,4_j 




■u 




J3 tn 


-s. 




^ 


JII 


43 




>d 


-d 






-d 






^ 






4= 




-d 




bO 




W) 


bC 






bc 


bo 






bo 






bfl 






bO 




bO 




bO 3 


5 




s 


S 






s 


S 






2 






2 






5 




2 




2 






d 


£J 








d 






d 






bO 
















"o 




<u 








u 






u 






d 
















c 




a 










a 






o. 






'4 
a 

2 
















i 




o 


d 
.S 


bO 




ID 


o 

<J3 












1 

tn 




tn 










d 




u 


d 




43 


<u 






V 








3 




i) 




« 




u 


o 




J 




2 




■*-> 
tn 


^ 






■5 






d M 




X! 
oJ 




a 

o3 




a 


a 




bO 

^d 

*> 


3 


i-i 




tn 








bO 

_d 
'> 






*d 
'c3 


1 




bO 

.d 




tn 




tn 

"o 


>» 




rt 


tn 


rt 




oS 






o3 








S 




'>. 




(U 




4) 


r3 




ID 


lU 






d 


lU 






0) 






V 






rt 




tn 




tn 


&H 




^ 


P^ 






<: 


hJ 






h-) 






P< 






Ah 




& 




P 


^ 


J 


^^ 


, 


tH 




**-i 


«*-! 






H-l 


, 




^ 






"izr 




, 






-c d 


o 


<u 


en 


4) 




o 


o 


^ 




O 






o 


IH 




o 




'd 


tn 


^ 


a 


J3 


bi 


J3 








a 






a 






a 








Ui 


<n 


Ul 


"j 


a 


o 


> 


si 
1 


-d 


^~ 




, , 


-d~ 






JS 






M 




v2xi 


03 

O-tn 
tj bo 


bpig 

d V 


d 


Id 

T3 


"O 






13 


XI 


1 


t3 




be U 

>. d d 


g & 


bO 


ss" 


d 


^*S ^' 


4^ 

a 


3 

73 


&. 


a 


_3 


& 


*-> 3 

a-B 


&. 


■w 
C 


i2^ 


11 


^=s 


c 




i; 




J3 


3 


,c 




3 


_c 




3 


d 




3 


•3 

3 


a 


a"3 


ank bi 
and a 
derlyi 


'S 

tn 
3 


tn 


2 


2 d 2 

« w aj 


a 
a 
8 


in 

d 


d 


a 
a 

o 


tn 

d 
o 

tn 


2 

d 


a 
a 

8 


tn 

d 


d 


a 
a 
8 


a 
1 


tn-^ 
(/3 


m 




CM 


O) 






o 


O 






O 






O 






O 




u 










SP 










































>> 








_d 


D, 
























4 
















M 








|d 


cx, 
























tn 

(J 












d' 
1 




1 


4> 




tn 


d 
"o 






3 










,£ 








o3 






iH 
1 




a 

o 




d 








03 

is 

T3 C 


4-1 

be 


















a 




,d 




a 


T3 

d 




55 

1 


T3 






a 
o 






■i-i 
d 

03 






a 
o 
d 
o 






03 




tn 

bO 




d 

IH 

> 

o 


cc 






fl< 


o 








u 








a. 












H 






Pii 




O 



U 




d 


, , 


o) 






« 


a 


o 

H 




1— ( 


o) 


Q 


s 


W 


lU 


1 


.r! 




H 





t-l -,<" 



h) 


-d 


43 




.sa 


til 


p^ 




W) 


o 


d 


tn 






'C 


O 


HH 




a 

o 

l-t 


(1| 
I-I 



44 



MATERIALS FOR ELEMENTARY ECONOMICS 



W 



f< 



^ / 2 



O 



Land 



12. FORMS OF WEALTH^ 

PmHiirtivp land \ ^"^^P ^^'^^' gJ'^zing land, timber land, 
iToductive lana ^ ^^^^j^^g j^^^^ hunting land, fisheries 



ways of .ransi. \ ^^tTS/^tS' 



Building land 
' Land improvements 

Raw materials 



Finished products 



Slaves 



Human Beings \ ^^J^ 



( Buildings 

] Improvements on highways 

( Minor 

( Mineral 
] Agricultural 
( Manufactured 



Overhead 
Underground 
Surfacing 
. Bridging 



/ Consumable 



Durable 



By being burned 

By being eaten or drunk 

By being otherwise used 

Mechanical devices 
Animals 
"Hard money" 
Clothing and jewelry 
' Fiu-niture and works of art 
Reading matter 
Minor 



Pi 



^ 



13. FORMS OF PROPERTY RIGHTS^ 
Complete (Fee Simple) 



Partial 



To services cut longitudinally 



To services cut transversely 



Rights to definite parts of 
services 



Minor and indefinite 



/ Rights in common 

) Rights to different usufructs 

i Partnership rights 

\ Joint stock shares 

!' Lease 
Reversion 
Patent and copyright 



Promises 



Orders 



! Bonds 
Private notes 
Bank notes 
Bank deposits 

Checks, drafts, and 
bills of exchange 

Irredeemable paper 
money 



( Good will and custom 
( Taxing power 



' From Irving Fisher, The Nature of Capital and Iiicotne, p. 7. 
Company, 1906. 

' Fisher, op. cit,, p. 37. 



The Macmillan 



WANTS AND MEANS OF SATISFACTION 45 

14. ESTIMATE OF WEALTH OF THE UNITED STATES, 1904' 

Total $107,104,192,410 

Real property and improvements $62,341,472,627 

Live stock 4,073,791,736 

Farm implements and machinery 844,989,863 

' Manufacturing machinery, tools and implements 3,297,754,180 

Gold and silver coin and bullion 1,998,603,303 

Railroads and their equipment 11,244,752,000 

Street railways 2,219,966,000 

Telegraph systems 227,400,000 

Telephone systems 585,840,000 

Pullman and private cars 123,000,000 

Shipping and canals 846,489,804 

Privately owned water works 275,000,000 

Privately owned electric light and power stations 562,851,105 

All other 

Agricultural products 1,899,379,652 

Manufactured products 7,409,291,668 

Imported merchandise 495,543,685 

Mining products 408,066,787 

Clothing and personal adornment 2,500,000,000 

Furniture, carriages and kindred property 5,750,000,000 

15. THE PRODUCTION OF ECONOMIC GOODS^ 

§ I. Most men are related to the business world in two ways: 
as workers they are attached to some particular business engaged in 
producing some special sort of goods or services; as consumers they 
are attached to general industry by a great number of suckers. In 
seeking to understand the industrial system a man is thus furnished 
with two approaches : his narrow concentrated interest as producer, 
his broad diffused interest as consumer. He learns at both ends 
but his curiosity is more strongly and more constantly directed by 
what goes on in the little corner of the industrial world in which he 
earns his living, the business in which he is employed. 

Turning his mind from the particular process on which he is 
mainly occupied, as a machine tender, a clerk, a laborer, a shop 

' From the Special Report of the United States Census Office, Wealth, Debt 
and Taxation (1907), p. 27. 

^ From J. A. Hobson, Tlie Industrial System, pp. i-io. Longmans, Green & 
Co., 1909. 



46 MATERIALS FOR ELEMENTARY ECONOMICS 

assistant, to what is taking place around him, he soon comes to get a 
grip of the main features of the structure of the business to which he 
"belongs." 

Here is an employee in a shoe factory: he sees around him a 
number of other wage-earners, most tending some machine, others 
clerks in the office; there is the factory itself and the premises it 
occupies, the machinery and fittings, the stock of leather and shoes 
in various stages of production; lastly comes the management, 
summarized in the employer or "boss." 

Such are the main ingredients of the business as he sees it encased 
in the four walls of the factory yard: in outline he comes to know how 
these ingredients are related, and he grasps the business as an organi- 
zation under the direction of the manager. 

If he tried to visualize the business in this broad outline it would 
take some such shape as this: 




As soon as he came to realize the business as a whole, he would 
recognize that in the counting-house or the bank there was some 
money that belonged to the business. 

A shop assistant or a mercantile clerk, who was not engaged in 
making goods but in collecting them, arranging and selling them, 
would find the general structure of his business similar, though the 
sort of work done and the instruments were different: plant would 
play a smaller part, there being very little machinery or tools; ma- 
terials and stock would only be a different arrangement of the same 
goods, and would occupy a much more prominent place; as buying 
and selling seemed the soul of such businesses, money would bulk 
larger in his conception of the business. 



WANTS AND MEANS OF SATISFACTION 47 




A farm laborer would see his business as a different sort of compo- 
sition: land, which formed a small element in the factory premises, 
and did not bulk very large even in the city warehouse or shop, 
would occupy a very prominent place in the farm; machinery might 
be a small factor, and the number of employees very few. 

The bricklayer working for a firm of builders would, again, form 
a different idea of his business, which, except as regards a small 
yard and office, was not really contained in fixed premises, but 
consisted rather in a number of fluctuating contracts which affected 
him as "jobs." But though the material outlines of his business 
would be less fixed and less clearly defined, he would come to recog- 
nize that his employer was in control of a number of workers, business 
premises, a stock of building materials, and some machinery, as well 
as money to buy materials and pay wages. 

To a keen observant worker the structure of the business in which 
he works would thus take shape, some of the necessary parts being 
clearer and better realized than others. The young business man, 
who enters the factory or the shop as a clerk, will see things from a 
somewhat different viewpoint from that of the manual worker; the 
employer's son, adopting from the first a managerial attitude, will 
more quickly get a more accurate outline of the working of the 
business as a whole. The worker, to whom the commercial or 
financial part of the factory or mine or warehouse is unexplored, 
often wrongly identifies his work- place as a complete business, whereas 
it is often only one branch or department of a larger business unit 
broken into a number of locally severed parts, each of which may seem 
to him an independent economic thing. 

The intelligent observer, studying his own business from inside 
and others from outside, will soon see that the true size and limits 



48 MATERIALS FOR ELEMENTARY ECONOMICS 

of a single separate business can best be determined by watching the 
element of management. Is there practically independent manage- 
ment, and if so, what is the area of its control ? is the important ques- 
tion to him. If the manager of a factory or shop receives his orders 
from outside, or in other important ways is instructed in the uses to 
which he puts his employees, his machinery, etc., and in the buying 
and selling essential to his business life, it becomes evident that such 
a factory or shop is not a complete business, but only part of some 
larger business. 

When we examine the grouping of businesses in trades and 
markets, we shall see many ways in which the liberty of manage- 
ment in businesses that seem to the ordinary employee free is cur- 
tailed; not only in retail trade, but in manufacturing, mining, and 
other industrial processes, many businesses which look to the unin- 
formed outsider free are tied by investments, contracts, mortgages, 
or other bonds of business life. 

Here, as elsewhere, liberty is a matter of degree. But at present 
it must suffice to say that substantial independence of management 
constitutes a separate business; where the employer or manager 
has substantial liberty in buying and selling and arranging his factory 
or shop or warehouse as he thinks best, we call his a separate business. 

We must, however, if we are to carry out our intention of including 
in our inquiry all processes of earning incomes or livelihoods, extend 
the use of the term ''business" from the processes engaged in making 
and distributing material goods to those which make or distribute 
non-material goods that are bought and sold. So a lawyer's firm, a 
doctor's practice, an artist's studio, a "cure of souls," a writer's 
Hterary connection, or any other production and sale of. skill or 
services which are under the control of a person or set of persons and 
form the basis of a livelihood, must be counted as a business. 

The whole of the business world must be conceived as producing 
quantities of material or immaterial articles, the sale of which fur- 
nishes the livelihood of the community, and the active units in these 
processes — extractive, manufacturing, transport, trading, financial, 
professional, artistic, recreative, domestic, etc. — are businesses. 

§ 2. Such businesses evidently differ from one another very 
widely, (a) in size, (b) in the relative importance of their constituent 
parts, and (c) in the ownership and control of the business. 

a) As regards size, an investigation of the industrial world 
shows immense variety even within the same sorts of trade. In 



WANTS AND MEANS OF SATISFACTION 49 

more primitive or backward countries very few large businesses 
exist in which a number of workers are brought together to work 
under a single management with large quantities of tools and materials. 
In such a country as China, or even Russia, the vast majority of 
businesses are confined to small workshops or home industry, where 
the manager works alone or with a few others, with simple tools and 
small stock of materials. Even in the most advanced industrial 
countries a large proportion of the businesses remain in this small 
size; the most highly developed industries in England or the United 
States still retain large quantities of home workers or other little 
business imits. 

In most departments of industry, even when great capitalist 
enterprise is prominent, great quantities of little simple businesses 
survive. The small peasant, working his plot of land with the 
labor of his own family, and living on the produce, still continues 
to exist in large numbers in most highly advanced nations: most of 
the world's food supply is still produced by these little independent 
farmers. Though large and expensively equipped factories have 
absorbed certain important branches of manufacture, and are con- 
stantly extending the reign of machinery over new fields of production, 
a very large proportion of the manufacturing arts still remains in 
small businesses, even in those textile and metal trades where large 
capitalism has established itself most strongly. Railroads, steam- 
ships, and carrying companies have not taken over all the transport 
industry; the small boatman, car-driver, and carrier still keep a hold 
on important branches of retail local traffic. In the building trades 
the big contractor leaves a lot of smaller or subsidiary work for little 
builders. Departmental stores and branch companies hold a large 
share of retail distribution, but they do not prevent immense quanti- 
ties of small shopkeepers from earning a precarious but independent 
livelihood. Even in mining and finance, two departments of activity 
where capitahsm is supreme, there still remains an area for the 
"placer" and the small jobber or money dealer. Regarding the 
professions from the standpoint of business structures, we perceive the 
individual or the small firm still in possession of the field, except in a 
few branches of the recreative, educational, and pubUshing arts. 

Whenever we look in any part of the industrial system we see 
businesses set out in different sizes, ranging from the single worker, 
who molds some material into a useful shape by the strength of his 
own body and the use of some simple tool, to the huge impersonal 



50 MATERIALS FOR ELEMENTARY ECONOMICS 

joint-stock company employing millions of capital and thousands 
of employees in various parts of the habitable globe, and between 
these two extremes a vast variety of intermediate sizes. 

h) Certain characters in the structure of a business correspond 
to differences of size, A small business is usually much simpler in 
structure; if it is engaged in handling materials to shape them into 
commodities, the element of labor usually bulks more largely than the 
others. Done usually in the home or workshops attached to the 
home, it has no need of specialized buildings; tools or machinery, 
though essential, do not represent a large expenditure; the power 
used in shaping or moving the materials is mostly got from the bodies 
of the workers, and not from coal or other non-human source. As a 
rule, such little businesses can be conducted with a very little store of 
cash. 

As we ascend toward businesses of larger size, the relative impor- 
tance of these factors shifts. Separate expensive buildings are 
usually required; the quantity of machinery and other plant grows 
so large that in many a modern mill, mine, railroad, or steamship 
several thousand pounds' worth of plant co-operates with each worker; 
fuel and the supply of power become enormously important items; 
the financial side of the business involves cash or credit, the use of 
money, as a large factor; while management, which in the small 
simple business was a merely incidental function of the independent 
worker, becomes a specialized separate department of supreme 
significance. 

c) The most vital of all differences between the small primitive 
business unit and the large capitalist unit has reference to the owner- 
ship and control of the various factors composing the business. 

The factors in a business, as we have seen, are land, buildings, 
machinery and tools, power, raw materials and stock, money, labor, 
and management. Every business which handles material goods 
requires some of each of these factors, though in widely different 
proportions. In the smallest simplest business form, where a work- 
man works alone on his own account in his own house or work-place 
he commonly is himself the owner of all these factors. Such is the 
smallest peasant freeholder in many countries, working his own 
land with his own tools and cattle, sowing his own seed, and owning 
his house and sheds and the farm produce. The village smith or other 
small artisan, certain cabinet makers, and other little manufacturers 
in London, still represent this early type. Large numbers of little 



WANTS AND MEANS OF SATISFACTION 51 

makers, e.g., tailors, cobblers, owning all the factors except the raw 
material, which they receive from their customers or from some 
merchant to whom they sell their product, everywhere survive. Here 
we may say that the worker is the owner of all, or nearly all, the factors 
including management. As we grade the various forms of business 
up from this to the most developed form of modern "capitalist" 
enterprise, we see one after another of the factors removed from the 
ownership and control of the worker and transferred to "management." 
In the complete capitalist business, land, machinery, and tools, 
power, raw materials and stock, money, labor-power are owned and 
controlled by the management, the single check upon absolute owner- 
ship being that the management does not own the laborers them- 
selves (as it owns the coal that furnishes machine power) but only 
the portions of labor-power as they are released from the persons of 
the workers. In certain great businesses some other factor, as, for 
instance, electric power or the land on which business premises stand, 
may be similarly hired, not owned. But, speaking generally, the 
management in the highly developed capitalist business owns and 
controls all the other factors. 

Between these two types a great number of intermediate types 
of businesses will be found. An immense variety of small farms, 
workshops, shops, and other commercial or professional businesses 
exist where the manager begins to separate from the workers, still 
working himself, but hiring other workers who have no part in 
management, though they may still own the tools with which they 
work, and even, as in many farms, fishing or mining businesses, some 
share of the stock and product. 

In some sorts of business the manager or employer owns materials, 
which he gives out to workers to do in their own homes, or in work- 
shops which they provide, either letting out to them machines or 
tools, or leaving the provision of machinery, sometimes also of power, 
to the workers. In agriculture and in the textile and metal manu- 
factures of England today one finds every stage of the business form 
represented, from the simplest type of the self-sufficient single worker 
to that of the joint-stock company owning and controlling every 
factor in production. 

In agriculture the small freeholder or yeoman, the tenant farmer, 
the market gardener, the allotment worker represent widely diver- 
gent types of ownership of land, fencing, tools, crops, etc.; fishing 
and mining are full of anomalies in ownership of tools, product, and 



52 MATERIALS FOR ELEMENTARY ECONOMICS 

management; the textile and clothing trades show every variety of 
business form, from the home workshop where the worker finds 
machinery, and, in part, raw materials, to the completely centralized 
factory; the metal trades exhibit in the higher form great engineering 
or steel-making firms owning everything they use, even coal and iron 
mines, trucks, and ships, but furnish a basis of survival not only for 
small Birmingham workshops working with hand-power on materials 
sometimes owned, sometimes provided for outside, but for Sheffield 
grinders recei\dng rough blades to be finished in their own workshops 
with hand-power, and small watchmakers in London or Coventry 
keeping up the earliest type of self-sufficing home workshop. 

Or turning to retail trade, we ffiid every variety still surviving 
in a large city; though perhaps few shopkeepers are owners of the 
land and shop premises, as regards stock, fittings, management, and 
labor, w^e see a gradation from the small independent shopkeeper, 
owning his owti stock and employing only his own family, to the great 
store which resembles the most highly evolved capitalist manufac- 
tures in every other feature except the part played by machinery and 
non-human power. 

When from the numerous types of business unit represented in 
these agricultural, manufacturing, and commercial occupations one 
turns to finance, including great banking and insurance firms and 
small money-lending businesses, or to the professions, the fine arts, 
the recreative arts, and the countless businesses engaged in supplying 
"personal" services, from the Turkish bath and barber's saloon 
down to the individual domestic service of a household — ^when one 
takes stock of all these sizes and sorts of industry, the shapes of 
the business seem to defy classification. But omitting the delicate 
question whether certain occupations are entitled to be called separate 
businesses, and conffiiing our attention to those which are commonly 
admitted so to rank, we find that while differing immensely in size, 
relative proportion of importance for several factors, and nature of 
ownership and control, they preserve certain common features. 

In all businesses concerned with extracting, shaping, or moving 
matter we find the matter itself to which the work is applied, the 
machines or tools by which the matter is manipulated, the money 
required for buying what is needed, the buildings or premises where 
the material is stored, or the tools kept, or the work carried on, 
with the necessary fittings or fixtures, the land from which the matter 
is extracted or upon the surface of which work is done, the workers 



WANTS AND MEANS OF SATISFACTION 53 

who do the work, and the employers or management. Even in 
businesses concerned with producing not material goods, but non- 
material services, such as professional advice, music, and other 
recreative services, etc., all these requisites, except in some cases 
raw materials, are needed, for the non-material services are produced 
under material conditions of space and shelter by workers who actually 
require tools or instruments and skilled direction or organization. 

In developing our picture of industry, we may, however, legiti- 
mately confine our attention chiefly to those industries engaged in 
producing material commodities, with merely occasional references 
to the arts concerned with non-material services. 

§ 3. For certain useful purposes of understanding how the mechan- 
ism of industry works, it will be convenient sometimes to gather 
together under a single class several of the factors or requisites of 
business which have here been separately described. So all the non- 
human factors in a business, except the land, may be grouped under 
the head of "capital," comprising buildings, machines and tools, 
fittings, fuel or power, materials, stock, money. Some would include 
land under capital, but, for reasons which will be given later, we shall 
find it best to distinguish the services directly rendered to production 
by earth, natural forces, and space, from those rendered by the other 
factors. Thus distinguishing land from capital, we may also dis- 
tinguish the materials which it is the object of the business to extract, 
shape, or move, from those material factors which are instruments 
for these productive processes, and which are used up with more or 
less rapidity as they do this work. The first, which is a continual 
stream of matter flowing through the business and passing out of it 
to customers, may be called "circulating" capital; the factories and 
other buildings where the work is done, machines, tools, railways, 
ships, carts, etc., may be called "fixed" capital, standing as it does 
at some fixed point in the industrial stream to forward the passage 
of the raw material or unfinished goods toward their final destiny as 
commodities. Of course every other sort of capital is used up in its 
work of helping to shape or move raw ma terials into their final form 
or place, and this "wear and tear" may be considered as passing into 
the goods that are produced, and so as "circulating" in the industrial 
world. But it is altogether more convenient to mark out the 
material whose manipulation is the direct and express object of a 
business, from the materials which are only means toward this 
process. 



54 MATERIALS FOR ELEMENTARY ECONOMICS 

Certain sorts of capital it has been found difficult to classify. 
Fuel, if regarded as merely instrumental to the operation of a machine, 
may be treated as "fixed"; but it is more conveniently regarded as a 
form of raw material worked into the main current in the form of 
power, and so classed as "circulating." 

Having thus designated the non-human factors of the business 
under land (or Nature) and capital (fixed or circulating), we come 
to the human factors spoken of as labor-power and management. 
As in the other cases, no absolutely rigid distinction can be made. 
We cannot confine labor-power to the manual or physical work in 
a business, reserving management for the mental guidance and 
organization. For all manual labor, regarded as production, con- 
tains mental and moral energy, nor is management devoid of all 
output of physical exertion. From the standpoint of physical and 
mental it would be possible to find a nice gradation in a complex 
modern business from the purely routine hand worker up to the general 
manager in his office, but nowhere could one find the point where 
•mental exertion began or physical left off. Nor can we definitely 
divide them as employer and employees, though for some purposes 
this division will work well. For in most great modern businesses the 
manager is nominally, often really, an employee of the directors or 
the shareholders, and, so far as the practical arts of management are 
concerned, they are not confined to the manager, but largely dele- 
gated to sub-managers, overseers, inspectors, and other "officials." 

Many, bearing these difficulties in mind, wish to lump all the 
human exertion, physical and mental, imder the general name " labor." 
But there are practical reasons for rejecting this solution. The part 
played by the man or men who direct the course of a business, the 
interest they have in the business and the gain they receive from the 
business, are in most instances so different from the part played by 
the men who merely receive and follow orders, and their interest and 
gain, that it is desirable to treat the two as different factors of a busi- 
ness. 

In most businesses "direction"^ and "management" are not 
sufficiently distinct to warrant any further distinction. In our 
preliminary analyses of the business unit we shall therefore treat 

' In many "companies" the personnel and the interests, as well as the work of 
director and manager, are of course separated. • 



WANTS AND MEANS OF SATISFACTION 55 

them as one, and regard both direction and management of the 
business as comprised for the most part in the manager or employer. 




Adopting, then, the commonly accepted distinctions, we may bring 
our more numerous factors of a business under the four conventional 
heads, land, capital, labor, and management, thus simplifying our 
portrait of the business as the unit of industry. 

i6. A CLASSIFICATION OF INDUSTRIES' 
The object of the analysis of industry given in this chapter has 
been to impress upon the reader the general outlines of the structure, 
taking for this purpose a rude classification of industrial processes. 
It may be well, following in the main the classification of Jevons,* 
to append the fuller analysis of industry which a scientific census of 
occupations would yield: 

Proprietors of land and natural sources of supply: Landowners, Quarry 
Owners, Mine Proprietors, Owners of Fishing Rights (functions generally 
of a passive kind) . 

Producers of raw materials: Agriculturists, Gardeners, Woodmen, 
Shepherds, Herdsmen, Hunters, etc. Miners, Colliers, Fishermen. 

Dealers in raw materials {middlemen between producers and manufac- 
turers): e.g., Corn Merchants, Corn Agents, Corn Factors, Corn Chandlers, 
Cotton Importers, Cotton Merchants, Cotton Brokers, Cotton Agents, 
Cotton Salesmen. 

Manufacturers (first order): e.g.. Corn Miller, Cotton Spinner, Timber 
Sawyer, Iron Smelter. 

' From J. A. Hobson, Tlie Industrial System, pp. 34-37. Longmans, Green & 
Co., 1909. 

[For a discussion of the classification of industries with special reference to 
occupations, see "The Classification of Occupations," Selection 53. — Editors.] 

^ Principles of Economics, pp. 108 ff. 



S6 MATERIALS FOR ELEMENTARY ECONOMICS 

Dealers (between two or more manufacturing processes): e.g., Flour 
Merchant (between Miller and Baker), Yarn Merchant (between Cotton, 
Spinner and Manufacturer), Timber Merchant (between Sawyer and 
Carpenter, etc.). 

Manufacturers (second order): Baker, Confectioner, Cotton Weaver, 
Dyer, Printer, Shirtmaker, etc. Cabinet Maker, Carpenter, etc. Rolling 
Mills, Engine Works, Cutlery, etc. (between any two processes a class or 
more of dealers may intervene) . 

Wholesale dealers in commodities: Warehousemen, Produce Merchants, 
Exporters, etc. (wholesale dealers in manufactured goods are often "general 
stores." In Foreign Trade, however, they specialize often {a) according 
to sea routes; {b) according to classes of manufacture, e.g., cotton goods, 
iron trade, etc.). 

Retail dealers: Shopkeepers, Hawkers, Costermongers, Licensed 
Victuallers, etc. (often comprising a final act of manufacture, e.g., butcher, 
confectioner, dressmaker, etc.). 

Transport (distributive industry according to Jevons): Carriers on 
Railways, Canals, Ships, Docks, Roads, Carriages, Horses (carrying raw 
materials from farm, mine, etc., to manufacture; carrying half -made goods 
between different orders of manufacture; carrying commodities between 
factories, wholesale dealers, retailers, and consumers). 

Subsidiary trades ("Any which merely assist other trades by supplying 
the minor requisites"): e.g.. Subsidiaries to Landowner: Estate Agent, 
Steward, Solicitors, Surveyors, etc. Subsidiaries to Farmers: Agricultural 
Implement Makers, Seed Merchants, Manure Merchants, etc. Subsidiaries 
to Corn Merchant: Granary Maker, Sack Maker, Corn-measure Maker, 
etc. Subsidiaries to Miller: Millwright, Machinist, Millstone Cutter, etc. 
Subsidiaries to Baker: Oven Builder, Peel Maker, Fuel Merchant, etc. 

Finance: Banking, Insurance, etc. 

This classification is based upon consideration of industrial 
processes, and marks the standpoint of the producer. 

The consumer's standpoint would yield a transverse classification 
on the basis of the sorts of utility or satisfaction afiforded by the 
commodities. 

Taking the chief orders of utility, we should classify along the 
following lines: 

Food: Bread Stuffs, Dairy Produce, Meat, Groceries, Beer, Wine, etc. 
(or according to materials, wheat, sugar, milk, etc.). 

Clothing: Over Wear (Suits, Dresses, etc.), Under Wear, Hats, Boots, 
Gloves, etc. (or according to material. Cotton, Wool, Flax, Silk, Leather, 
India-rubber, etc.). 



WANTS AND MEANS OF SATISFACTION 57 

Lodging: Dwelling-houses, Furniture, Crockery, etc. (according to 
materials — Wood, Stone, Steel, Brick, etc.). 

Refinements: Ornaments, Amusements, Literature, etc. 

Jevons, in suggesting the classification of occupations according 
to "commodity," based upon the four great classes, food, clothing, 
lodging, refinements, does not, however, as might have been expected, 
cleave to the consumer's standpoint (which I have here preferred), 
but divides his classes according to kinds of material used, not accord- 
ing to the "wants" satisfied. 

A really scientific classification from the consumer's standpoint 
would be based upon a psycho-physical analysis of wants, beginning 
with food, shelter, clothing in their elementary uses as life-preservers, 
and proceeding to the higher and more specialized wants (conveni- 
ences, luxuries, etc.), as they arise in natural order from the satis- 
faction of the primary physical wants. 

Industries and occupations would then be classified in relation 
to these needs or wants. The term refinements cannot even be 
regarded as containing the germ-idea of such a classification. 



III. NATURAL RESOURCES AS ECONOMIC 
FACTORS 

17. THE FUNCTION OF NATURAL AGENTS' 

In this inquiry the earth as modifying human life includes the 
land surface down to the bottom of the deepest possible mine or 
artesian well or geological stratum; all the aqueous mass — that 
is, every drop of water in the seas and out of them, for there is no 
telling when any drop may enter the circle of human agencies and 
ownerships; the circumambient air, every gallon of that aerial 
ocean which swathes the world and vitalizes all living things, the 
common carrier of clouds and birds, of health and disease, of music 
and perfumes, of industry and commerce. As modifying human 
conduct, as subject of pre-emption and monopoly, not only the masses 
just mentioned are included, but motions and powers, even gravity, 
mechanical properties, physical forces, chemical activities, vital 
phenomena of plants and animals, that may be covered by patents 
and their uses become a matter of legislation and diplomacy. 

The earth is the mother of all mankind. Out of her came 
they. Her traits, attributes, characteristics they have so thor- 
oughly inherited and imbibed that, from any doctrinal point of 
view regarding the origin of the species, the earth may be said to 
have been created for men and men to have been created out of the 
earth. By her nurture and tuition they grow up and flourish, and 
folded in her bosom they sleep the sleep of death. 

The human race is put into relation with all bodies through 
gravitation, with all mineral, vegetable, and animal substances 
through the laws of physics and chemistry; with the vegetal and 
the animal kingdom through the additional phenomena called life, 
and with all animals through mentation. 

The earth is also a great warehouse of materials of infinite 
qualifications for gratifying human desires. 

This is apparent enough to anyone who reflects about it, but 
few persons think of the long ages during which these substances 

'Adapted from Otis T. Mason, " Technogeography, or the Relation of the 
Earth to the Industries of Mankind," in the American Anthropologist, VII (1894), 
138-58. 

58 



NATURAL RESOURCES AS ECONOMIC FACTORS 59 

were being compounded and compacted. These materials are 
the foundation of all technique and all styles of technique — textile, 
plastic, graphic, glyphic, tonic, and landscape. For them the earth 
not only furnishes the raw stufifs, but the apparatus and different 
motives to different races. 

Before quitting the subject of the study of the earth as a ware- 
house the student ought not to overlook the varied characteristics 
of these resources. The qualities of things are the earth's, the 
grains and colors of the same stone, the elasticity and fibers of timber, 
the plasticity and temper of clays, the malleability and ductility 
of the same metals, and so on. So marked are these that in our 
higher civilization we must have iron from half a dozen countries 
to conduct one of our complex establishments. The very diversity 
of the same material from place to place has resulted in the production 
of the greatest possible variety of skill. 

The earth is also the reservoir of all locomotion and power useful 
to man. Even the strength of his own limbs and back is derived 
from the food which she bestows. I do not speak of that, however, 
but of the substitutes therefor. She gives to the North American 
Indians the dog, to the South American the llama, to the people of 
the eastern continent the horse, ass, camel, elephant, and ox to convey 
them about and to carry or draw their loads. 

The winds blow upon the sails and turn the mills, the waters 
set in motion the wheels and transport the freight. The steam 
is a still more versatile genius of power, and electricity just enters 
upon its mission. Coal, as a cheap source of energy, enables men 
to substitute for areas of raw material areas of manufacture and, 
indeed, to create areas of consumption. 

The several kingdoms and forces of nature give rise to their 
several bodies of arts, each of which springs from the earth. 

It would occupy too much space were I to elaborate in the most 
elementary manner the methods in which domestic animals, wind, 
fire, water, elasticity of solids, elasticity of gases, explosives, chemical 
action, magnetism, and electricity had enrolled themselves in the 
service of mankind merely to furnish power to do the work that in 
the simplest form is done by hand. Every one of them must have 
struck terror into the hearts of the first men. By being subdued 
they obeyed the principle of increasing their own usefulness and 
indispensableness by creating and complicating new wants. 



6o MATERIALS FOR ELEMENTARY ECONOMICS 

The form of the globe, its coast lines, elevations and reliefs, 
the amount of sunshine, the properties and contents of the atmos- 
phere, the varying temperatures, winds, rainfalls, and springs beneath 
the surface, the waterfalls in the surface also act as motives, if not 
as motive power to all apparatus and all the movements of men. 
We cannot eliminate the heavenly bodies from this enumeration, 
since they furnished clocks and almanacs and compasses to primitive 
peoples, and longer voyages were undertaken by their guidance in 
the Pacific than were made two centuries later in the Atlantic by 
Columbus with the aid of the mariner's compass. 

Exploitation and cultivation, manufacture, transportation, 
exchange, consumption, as I have previously said, together con- 
stitute the round through which commodities are conducted in the 
progress of industries. The proposition is that the earth was in 
the beginning and is now the teacher of these activities. There 
were quarriers, miners, lumberers, gleaners, and, some say, planters; 
there were fishermen, fowlers, trappers, and hunters before there 
was a genus homo. There were also manufacturers in clay, in textiles, 
and in animal substances before there were potters, weavers, and 
furriers ; there were all sorts of moving material and carrying passen- 
gers and engineering of the simplest sort. It might be presumption 
to hint that there existed a sort of barter, but the exchange of care 
and food for the honeyed secretions of the body going on between 
the ants and the aphidae look very much like it. 

In all this, the race has grown, not independent of the earth, 
but more dependent upon it. Artificial and domesticated supplies 
of material are as much from the earth as the wildest. Men in 
devising tools and machinery and engines to do the work of their 
hands have had to go to their mother for them. They use other 
forces than their own, but they are still forces furnished by the 
earth. They have multiplied invention upon invention, but every 
one of them is a device for using a great loan already in hand for 
the purpose of raising a larger one. 

In this partnership between man and the earth the progress 
of culture has been from naturalism to artificialism; from exploita- 
tion to cultivation and domestication; from mere muscular power 
to more subtle physical force of man, of beast, of water, of air, of 
fire, of electricity; from tools to machinery; from simplest imitative 
processes to highly complex processes, involving many materials 



NATURAL RESOURCES AS ECONOMIC FACTORS 6 1 

and motive powers and inventions; from short journeys to long 
journeys; from mere barter to world-embracing commerce; from 
monotonous and monorganic food and clothing, shelter and furniture, 
mental and social appliances to forms as complex and varied as the 
imagination can conceive. And when the supply gives out, it is 
not the earth that fails, but it is the comprehension and the skill of 
men. 

i8. THE INFLUENCE OF GEOGRAPHIC FACTORS' 

In every problem of history there are two main factors, variously 
stated as heredity and environment, man and his geographic con- 
ditions, the internal forces of race and the external forces of habitat. 
Now the geographic element in the long history of human develop- 
ment has been operating strongly and operating persistently. Herein 
lies its importance. It is a stable force. It never sleeps. This 
natural environment, this physical basis of history, is for all intents 
and purposes immutable in comparison with the other factor in the 
problem — shifting, plastic, progressive, retrogressive man. 

History tends to repeat itself largely owing to this steady, 
unchanging geographic element. If the ancient Roman consul in 
far-away Britain often assumed an independence of action and 
initiative unknown to the provincial governors of Gaul, and if cen- 
turies later Roman Catholicism in England maintained a similar 
independence toward the Holy See, both facts have their cause 
in the remoteness of Britain from the center of political or eccle- 
siastical power in Rome. If the independence of the Roman consul 
in Britain was duplicated later by the attitude of the Thirteen 
Colonies toward England, and again within the young republic 
by the headstrong self-reliance, impatient of government authority, 
which characterized the early trans-Allegheny commonwealths in 
their aggressive Indian policy, and led them to make war and con- 
clude treaties for the cession of land like sovereign states; and if 
this attitude of independence in the over-mountain men reappeared 
in a spirit of political defection looking toward secession from the 
Union and a new combination with their British neighbor on the 
Great Lakes or the Spanish beyond the Mississippi, these are all the 
identical effects of geographical remoteness made yet more remote 
by barriers of mountain and sea. 

' Adapted from Ellen Churchill Semple, Influences of Geographic Environ- 
ment, pp. 2-20. Henry Holt & Co., 191 1. 



62 MATERIALS FOR ELEMENTARY ECONOMICS 

As the surface of the earth presents obstacles, so it offers 
channels for the easy movement of humanity, grooves whose direc- 
tion determines the destination of unknowing, unplanned migrations, 
and whose termini become, therefore, regions of historical importance. 
Along these nature-made highways history repeats itself. The mari- 
time plain of Palestine has been an established route of commerce 
and war from the time of Sennacherib to Napoleon. The Danube 
valley has admitted to central Europe a long list of barbarian invaders, 
covering the period from Attila the Hun to the Turkish beseigers of 
Vienna in 1683. The history of the Danube valley has been one of 
warring throngs, of shifting political frontiers, and unassimilated 
races; but as the river is a great natural highway, every neighboring 
state wants to front upon it and strives to secure it as a boundary. 

The movements of peoples constantly recur to these old grooves. 
The unmarked path of the voyageur's canoe, bringing out pelts 
from Lake Superior to the fur market at Montreal, is followed to-day 
by whaleback steamers with their cargoes of Manitoba wheat. Today 
the Mohawk depression through the northern Appalachians diverts 
some of Canada's trade from the Great Lakes to the Hudson, just 
as in the seventeenth century it enabled the Dutch at New Amster- 
dam and later the EngHsh at Albany to tap the fur trade of Canada's 
frozen forests. Formerly a line of stream and portage, it carries now 
the Erie Canal and New York Central Railroad. Similarly the nar- 
row level belt of land extending from the mouth of the Hudson to the 
eastern elbow of the lower Delaware, defining the outer margin of the 
rough hill country of northern New Jersey and the inner margin of 
the smooth coastal plain, has been from savage days such a natural 
thoroughfare. Here ran the trail of the Lenni-Lenapi Indians; a 
httle later the old Dutch road, between New Amsterdam and the 
Delaware trading-posts; yet later the King's Highway from New 
York to Philadelphia. In 1838 it became the route of the Delaware 
and Raritan Canal, and more recently of the Pennsylvania Railroad 
between New York and Philadelphia. 

The great belt of deserts and steppes extending across the Old 
World gives us a vast territory of rare historical uniformity. From 
time immemorial they have borne and bred tribes of wandering 
herdsmen; they have sent out the invading hordes who, in successive 
waves of conquest, have overwhelmed the neighboring river lowlands 
of Eurasia and Africa. They have given birth in turn to Scythians, 
Indo-Aryans, Avars, Huns, Saracens, Tartars, and Turks, as to the 



NATURAL RESOURCES AS ECONOMIC FACTORS 63 

Tuareg tribes of the Sahara, the Sudanese, and Bantu folk of the 
African grasslands. But whether these various peoples have been 
Negroes, Hamites, Semites, Indo-Europeans, or Mongolians, they 
have always been pastoral nomads. The description given by 
Herodotus of the ancient Scythians is applicable in its main features 
to the Kirghis and Kalmuk who inhabit the Caspian plains today. 
The environment of this dry grassland operates now to produce the 
same mode of life and social organization as it did 2,400 years ago; 
stamps the cavalry tribes of Cossacks as it did the moxmted Huns; 
energizes its sons by its dry bracing air, toughens them by its harsh 
conditions of life, organizes them into a mobilized army, always mov- 
ing with its pastoral commissariat. Then when population presses 
too hard upon the meager sources of subsistence, when a summer 
drought burns the pastures and dries up the water-holes, it sends 
them forth on a mission of conquest, to seek abundance in the better 
watered lands of their agricultural neighbors. 

Owing to the evolution of geographic relations, the physical 
environment favorable to one stage of development may be adverse 
to another, and vice versa. For instance, a small, isolated, and 
protected habitat, like that of Egypt, Phoenicia, Crete, and Greece, 
encourages the birth and precocious growth of civilization; but 
later it may cramp progress, and lend the stamp of arrested develop- 
ment to a people who were once the model for all their little world. 
Open and wind-swept Russia, lacking these small warm nurseries 
where Nature could cuddle her children, has bred upon its bound- 
less plains a massive, untutored, homogeneous folk, fed upon the 
crumbs of culture that have fallen from the richer tables of 
Europe. But that item of area is a variable quantity in the 
equation. It changes its character at a higher state of cultural 
development. Consequently, when the Muscovite people, instructed 
by the example of western Europe, shall have grown up intellectu- 
ally, economically, and politically to their big territory, its area 
will become a great national asset. Russia will come into its 
own, heir to a long-withheld inheritance. Many of its previous 
geographic disadvantages will vanish, like the diseases of child- 
hood, while its massive size will dwarf many previous advantages 
of its European neighbors. 

Let us consider the interplay of the forces of land and sea apparent 
in every country with a maritime location. In some cases a small, 
infertile, niggardly country conspires with a beckoning sea to drive 



64 MATERIALS FOR ELEMENTARY ECONOMICS 

its sons out upon the deep; in others a wide territory with a generous 
soil keeps its well-fed children at home and silences the call of the 
sea. In ancient Phoenicia and Greece, in Norway, Finland, New 
England, in savage Chile and Tierra del Fuego, and the Indian coast 
district of British Columbia, and southern Alaska, a long, broken 
shoreline, numerous harbors, outlying islands, abundant timber for 
the construction of ships, difi&cult communication by land, all tempted 
the inhabitants to a sea-faring life. While the sea drew, the land 
drove in the same direction. There a hilly or mountainous interior 
putting obstacles in the way of landward expansion, sterile slopes, 
a paucity of level, arable land, an excessive or deficient rainfall 
withholding from agriculture the rewards of tillage — some or all of 
these factors combined to compel the inhabitants to seek on the sea 
the livelihood denied by the land. Here both forces worked in the 
same direction. 

In England conditions were much the same, and from the six- 
teenth century produced there a predominant maritime development 
which was due not solely to a long indented coastline and an excep- 
tional location for participating in European and American trade. 
Its limited island area, its large extent of rugged hills and chalky 
soil fit only for pasturage, and the lack of a really generous natural 
endowment made it slow to answer the demands of a growing popu- 
lation, till the industrial development of the nineteenth century 
exploited its mineral wealth. So the English turned to the sea — to 
fish, to trade, to colonize. Holland's conditions made for the same 
development. She united advantages of coastline and position with 
a small infertile territory, consisting chiefly of water-soaked grazing 
lands. When at the zenith of her maritime development, a native 
authority estimated that the soil of Holland could not support more 
than one-eighth of her inhabitants. The meager products of the 
land had to be eked out by the harvest of the sea. Fish assumed 
an important place in the diet of the Dutch, and when a process of 
curing it was discovered, laid the foundation of Holland's export 
trade. A geographical location central to the Baltic and North 
Sea countries, and accessible to France and Portugal, combined with 
a position at the mouth of the great German rivers, made it absorb 
the carrying trade of northern Europe. Land and sea co-operated in 
its maritime development. 

Often the forces of land and sea are directly opposed. If a 
country's geographic conditions are favorable to agriculture and 



NATURAL RESOURCES AS ECONOMIC FACTORS 65 

offer room for growth of population, the land forces prevail, because 
man is primarily a terrestrial animal. Such a country illustrates 
what Chisholm, with Attic nicety of speech, calls "the influence of 
bread-power on history," as opposed to Mahan's sea-power. France, 
like England, had a long coastline, abundant harbors, and an excellent 
location for maritime supremacy and colonial expansion; but her 
larger area and greater amount of fertile soil put off the hour of a 
redundant population such as England suffered from, even in Henry 
VIII's time. Moreover, in consequence of steady continental expan- 
sion from the twelfth to the eighteenth century and a political uni- 
fication which made its area more effective for the support of the 
people, the French of Richelieu's time, except those from certain 
districts, took to the sea, not by natural impulse as did the English 
and Dutch, but rather under the spur of government initiative. 
They therefore achieved far less in maritime trade and colonization. 
In ancient Palestine, a long stretch of coast, poorly equipped with 
harbors, but accessible to the rich Mediterranean trade, failed to 
offset the attractions of the gardens and orchards of the Jordan 
valley and the pastures of the Judean hills, or to overcome the land- 
born predilections and aptitudes of the desert-bred Jews. Similarly 
the river-fringed peninsulas of Virginia and Maryland, opening wide 
their doors to the incoming sea, were powerless, nevertheless, to 
draw the settlers away from the riotous productiveness of the wide 
tidewater plains. Here again the geographic force of the land out- 
weighed that of the sea and became the dominant factor in directing 
the activities of the inhabitants. 

Heinrich von Treitschke, in his recent Politik, imitates the direct 
inference of Buckle when he ascribes the absence of artistic and 
poetic development in Switzerland and the Alpine lands to the 
overwhelming aspect of nature there, its majestic sublimity which 
paralyzes the mind. He reinforces his position by the fact that, 
by contrast, the lower mountains and hill country of Swabia, Fran- 
conia, and Thuringia, where nature is gentler, stimulating, appealing, 
and not overpowering, have produced many poets and artists. The 
facts are incontestable. They appear in France in the geographical 
distribution of the awards made by the Paris Salon of 1896. Judg- 
ing by these awards the rough highlands of Savoy, Alpine Provence, 
the massive eastern Pyrenees, and the Auvergne plateau, together 
with the barren peninsula, Brittany, are singularly lacking in artistic 
instinct, while art flourishes in all the river lowlands of France. 



66 MATERIALS FOR ELEMENTARY ECONOMICS 

Moreover, French men of letters, by the distribution of their birth- 
places, are essentially products of fluvial valleys, and plains, rarely 
of upland and mountain. 

This contrast has been ascribed to a fundamental ethnic dis- 
tinction between the Teutonic population of the lowlands and the 
Alpine or Celtic stock which survives in the protected isolation of 
highland and peninsula, thus making talent an attribute of race. 
But the Po valley of northern Italy, whose population contains a 
strong infusion of this supposedly stultifying Alpine blood, and the 
neighboring lowlands and hill country of Tuscany show an enormous 
preponderance of intellectual and artistic power over the highlands 
of the peninsula. Hence the same contrast appears among different 
races under like geographic conditions. Moreover, in France, other 
social phenomena, such as suicide, divorce, decreasing birth-rate, 
and radicalism in politics show this same startling parallelism of 
geographic distribution ; and these cannot be attributed to the stimu- 
lating or depressing effect of natural scenery on the human mind. 

Mountain regions discourage the budding of genius because they 
are areas of isolation, confinement, remote from the great currents 
of men and ideas that move along the river valleys. They are 
regions of much labor and little leisure, of poverty today and anxiety 
for the morrow, of toil-cramped hands and toil-dulled brains. In 
the fertile alluvial plains are wealth, leisure, contact with many minds, 
large urban centers where commodities and ideas are exchanged. 
The two contrasted environments produce directly certain economic 
and social results, which in turn become the causes of secondary 
intellectual and artistic effects. The low moimtains of central 
Germany which von Treitschke cites as homes of poets and artists, 
owing to abundant and varied mineral wealth, are the seats of active 
industries and dense populations, while their low reliefs present no 
serious obstacle to the numerous highways across them. They, 
therefore, afford all conditions for culture. 

19. THE FRONTIER IN AMERICAN HISTORY^ 

Behind institutions, behind constitutional forms and modifica- 
tions lie the vital forces that call these organs into life and shape 
them to meet changing conditions. The peculiarity of American 

' Adapted from F. J. Turner, The Significance of the Frontier in American 
History, in the Fifth Year Book of the National Herbart Society, and an earlier 
edition in American Historical Association, Report, 1893, pp. 199-227. 



NATURAL RESOURCES AS ECONOMIC FACTORS 67 

institutions is the fact that they have been compelled to adapt them- 
selves to the changes of an expanding people — to the change involved 
in crossing a continent, in winning a wilderness, and in developing 
at each area of this progress out of the primitive economic and politi- 
cal conditions of the frontier into the complexity of city life. Ameri- 
can development has exhibited not merely advance along a single 
line, but a return to primitive conditions on a continually advancing 
frontier line, and a new development for that area. American 
social development has been continually beginning over again 
on the frontier. This perennial rebirth, this fluidity of American 
life, this expansion westward with its new opportunities, its 
continuous touch with the simplicity of primitive society, furnish 
the forces dominating American character. The true point of 
view in the history of this nation is not the Atlantic coast: it 
is the great West. Even the slavery struggle, which is made 
so exclusive an object of attention by some historians, occupies 
its important place in American history because of its relation to 
westward expansion. 

At first the frontier was the Atlantic coast. It was the frontier of 
Europe in a very real sense. Moving westward, the frontier became 
more and more American. As successive terminal moraines result 
from successive glaciations, so each frontier leaves its traces behind it, 
and when it becomes a settled area the region still partakes of its 
frontier characteristics. Thus the advance of the frontier has meant 
a steady movement away from the influence of Europe, a steady 
growth of independence on American lines. And to study this ad- 
vance, the men who grew up under these conditions, and the political' 
economic, and social results of it, is to study the really American 
part of our history. 

Composite nationality. — First, we note that the frontier promoted 
the formation of a composite nationality for the American people. 
The coast was preponderantly English, but the later tides of con- 
tinental immigration flowed across to the free lands. 

In the crucible of the frontier the immigrants were American- 
ized, liberated, and fused into a mixed race, English in neither 
nationality nor characteristics. The process has gone on from the 
early days to our own. Burke and other writers in the middle of 
the eighteenth century believed that Pennsylvania was "threatened 



68 MATERIALS FOR ELEMENTARY ECONOMICS 

with the danger of being wholly foreign in language, manners, and 
perhaps even inclinations." The German and Scotch-Irish elements 
in the frontier of the South were only less great. In the middle of the 
present century the German element in Wisconsin was already so 
considerable that leading publicists looked to the creation of a German 
state out of the commonwealth by concentrating their colonization. 
By the census of 1890 South Dakota had a percentage of persons of 
foreign parentage to total population of sixty; Wisconsin, seventy- 
three; Minnesota, seventy-five; and North Dakota, seventy-nine. 
Such examples teach us to beware of misinterpreting the fact that 
there is a common English speech in America into a belief that the 
stock is also English. 

Industrial independence. — In another way the advance of the 
frontier decreased our dependence on England. The coast, particu- 
larly of the South, lacked diversified industries, and was dependent 
on England for the bulk of its supplies. Before long the frontier 
created a demand for merchants. As it retreated from the coast 
it became less and less possible for England to bring her supplies 
directly to the consumers' wharfs, and carry away staple crops, and 
staple crops began to give way to diversified agriculture for a time- 

Effects on national legislation. — The legislation which most de- 
veloped the power of the national government, and played the largest 
part in its activity, was conditioned on the frontier. Writers have 
discussed the subjects of tariff, land, and internal improvement as 
subsidiary to the slavery question. But when American history comes 
to be rightly viewed it will be seen that the slavery question is an 
incident. The growth of nationalism and the evolution of American 
political institutions were dependent on the advance of the frontier. 
The pioneer needed the goods of the coast, and so the grand series of 
internal improvement and railroad legislation began, with potent 
nationalizing effects. Over internal improvements occurred great 
debates, in which grave constitutional questions were discussed. 
Sectional groupings appear in the votes, profoundly significant for 
the historian. Loose construction increased as the nation marched 
westward. But the West was not content with bringing the farm to 
the factory. Under the lead of Clay — "Harry of the West" — ^pro- 
tective tariffs were passed, with the cry of bringing the factory to 
the farm. 

Effects on institutions. — It is hardly necessary to do more than 
mention the fact that the West was a field in which new political 



NATURAL RESOURCES AS ECONOMIC FACTORS 69 

institutions were to be created. It offered a wide opportunity for 
speculative creation and for adjustment of old institutions to new 
conditions. The study of the evolution of western institutions shows 
how slight was the proportion of actual theoretic invention of institu- 
tions; but there is abundance of opportunity for study of the sources 
of the institutions actually chosen, the causes of the selection, the 
degree of transformation by the new conditions, and the new institu- 
tions actually produced by the new environment. 

The public domain. — The public domain has been a force of pro- 
found importance in the nationalization and development of the 
government. The effects of the struggle of the landed and the land- 
less states, and of the ordinance of 1787, need no discussion. Ad- 
ministratively the frontier called out some of the highest and most 
vitalizing activities of the general government. The purchase of 
Louisiana was perhaps the constitutional turning point in the history 
of the republic, inasmuch as it afforded both a new area for national 
legislation and the occasion of the downfall of the policy of strict 
construction. But the purchase of Louisiana was called out by 
frontier needs and demands. As frontier states accrued to the Union 
the national power grew. 

When we consider the public domain from the point of view of 
the sale and disposal of the public lands, we are again brought face 
to face with the frontier. The policy of the United States in dealing 
with its lands is in sharp contrast with the European system of 
scientific administration. Efforts to make this domain a source of 
revenue, and to withhold it from emigrants in order that settlement 
might be compact, were in vain. The jealousy and the fears of the 
East were powerless in the face of the demands of the frontiersmen. 
John Quincy Adams was obliged to confess: "My own system of 
administration, which was to make the national domain the inexhaust- 
ible fund for progressive and unceasing internal improvement, has 
failed." The reason is obvious; a system of administration was not 
what the West demanded; it wanted land. 

National Tendencies of the frontier. — It is safe to say that the 
legislation with regard to land, tariff, and internal improvements — 
the American system of the nationalizing Whig party — was con- 
ditioned on frontier ideas and needs. But it was not merely in legis- 
lative action that the frontier worked against the sectionalism of the 
coast. The economic and social characteristics of the ' frontier 
worked against sectionalism. The men of the frontier had closer 



70 MATERIALS FOR ELEMENTARY ECONOMICS 

resemblances to the middle region than to either of the other sections. 
Pennsylvania had been the seed plot of southern frontier emigration, 
and although she passed on her settlers along the Great Valley into 
the west of Virginia and the Carolinas, yet the industrial society of 
these southern frontiersmen was always more like that of the middle 
region than like that of the tidewater portion of the South, which 
later came to spread its industrial type throughout the South. 

The middle region, entered by New York harbor, was an open 
door to all Europe. The tidewater part of the South represented 
typical Englishmen, modified by a warm climate and servile labor, 
and living in baronial fashion on great plantations; New England 
stood for a special English movement — Puritanism. The middle 
region was less English than the other sections. It had a wide 
mixture of nationalities, a varied society, the mixed town and county 
system of local government, a varied economic life, many religious 
sects. In short, it was a region mediating between New England 
and the South, and the East and the West. It represented the com- 
posite nationality which the contemporary United States exhibits, 
that juxtaposition of non-English groups, occupying a valley or a 
little settlement, and presenting reflections of the map of Europe in 
their variety. It was democratic and non-sectional, if not national; 
"easy, tolerant, and contented"; rooted strongly in material pros- 
perity. It was typical of the modern United States. It was least 
sectional, not only because it lay between North and South, but also 
because with no barriers to shut out its frontiers from its settled 
region, and with a system of connecting waterways, the middle 
region mediated between East and West as well as between North 
and South. Thus it became the typically American region. Even 
the New Englander, who was shut out from the frontier by the 
middle region, tarrying in New York or Pennsylvania on his westward 
march, lost the acuteness of his sectionalism on the way. 

Growth of democracy. — But the most important effect of the frontier 
has been in the promotion of democracy here and in Europe. As has 
been indicated, the frontier is productive of individualism. Complex 
society is precipitated by the wilderness into a kind of primitive 
organization based on the family. The tendency is anti-social. It 
produces antipathy to control, and particularly to any direct control. 

The frontier states that came into the Union in the first quarter 
of a century of its existence came in with democratic suffrage provi- 
sions, and had reactive effects of the highest importance upon the 



NATURAL RESOURCES AS ECONOMIC FACTORS 71 

older states whose peoples were being attracted there. An extension 
of the franchise became essential. It was ivestern New York that 
forced an extension of suffrage in the constitutional convention of 
that state in 1821; and it was western Virginia that compelled the 
tidewater region to put a more liberal suffrage provision in the con- 
stitution framed in 1830, and to give to the frontier region a more 
nearly proportionate representation with the tidewater aristocracy. 
The rise of democracy as an effective force in the nation came in with 
western preponderance under Jackson and William Henry Harrison, 
and it meant the triumph of the frontier — with all of its good 
and with all of its evil element. 

So long as free land exists, the opportunity for a competency 
exists, and economic power secures political power. But the democ- 
racy born of free land, strong in selfishness and individualism, intoler- 
ant of administrative experience and education, and pressing indi- 
vidual liberty beyond its proper bounds, has its dangers as well as 
its benefits. Individualism in America has allowed a laxity in regard 
to governmental affairs which has rendered possible the spoils system 
and all the manifest evils that follow from the lack of a highly devel- 
oped civic spirit. In this connection may be noted also the influence 
of frontier conditions in permitting inflated paper currency and wild- 
cat banking. The colonial and revolutionary frontier was the region 
whence emanated many of the worst forms of paper currency. The 
West in the War of 181 2 repeated the phenomenon on the frontier 
of that day, while the speculation and wild-cat banking of the period 
of the crisis of 1837 occurred on the new frontier belt of the next tier 
of states. Thus each one of the periods of paper-money projects 
coincides with periods when a new set of frontier communities had 
arisen, and coincides in area with these successive frontiers, for the 
most part. The recent radical Populist agitation is a case in point. 
Many a state that now declines any connection with the tenets of the 
Populists itself adhered to such ideas in an earlier stage of the develop- 
ment of the state. A primitive society can hardly be expected to 
show the appreciation of the complexity of business interests in a 
developed society. The continual recurrence of these areas of paper- 
money agitation is another evidence that the frontier can be isolated 
and studied as a factor in American history of the highest importance. 

Intellectual traits. — From the conditions of frontier life came 
intellectual traits of profound importance. The works of travelers 



72 MATERIALS FOR ELEMENTARY ECONOMICS 

along each frontier from colonial days onward describe certain common 
traits, and these traits have, while softening down, still persisted 
as survivals in the place of their origin, even when a higher social 
organization succeeded. The result is that to the frontier the Ameri- 
can intellect owes its striking characteristics. That coarseness and 
strength combined with acuteness and inquisitiveness; that practical 
inventive turn of mind, quick to find expedients; that masterful 
grasp of material things, lacking in the artistic, but powerful to effect 
great ends; that restless, nervous energy; that dominant individual- 
ism, working for good and for evil, and, withal, that buoyancy and 
exuberance which come with freedom — these are traits of the frontier, 
or traits called out elsewhere because of the existence of the frontier. 
We are not easily aware of the deep influence of this individualistic 
way of thinking upon our present conditions. It persists in the 
midst of a society that has passed away from the conditions that 
occasioned it. It makes it difficult to secure social regulation of 
business enterprises that are essentially public; it is a stumbling- 
block in the way of civil-service reform; it permeates our doctrines 
of education; but with the passing of the free lands a vast extension 
of the social tendency may be expected in America. 

Ratzel, the well-known geographer, has pointed out the fact that 
for centuries the great unoccupied area of America furnished to the 
American spirit something of its own largeness. It has given a 
largeness of design and an optimism to American thought. Since 
the days when the fleet of Columbus sailed into the waters of the New 
World, America has been another name for opportunity, and the 
people of the United States have taken their tone from the incessant 
expansion which has not only been open, but has even been forced 
upon them. He would be a rash prophet who should assert that the 
expansive character of American life has now entirely ceased. Move- 
ment has been its dominant fact, and, unless this training has no 
effect upon a people, the American energy will continually demand a 
wider field for its exercise. But never again will such gifts of free 
land offer themselves. For a moment, at the frontier, the bonds of 
custom are broken and unrestraint is triumphant. There is not 
tabula rasa. The stubborn American environment is there with its 
imperious summons to accept its conditions; the inherited ways of 
doing things are also there; and yet, in spite of environment, and in 
spite of custom, each frontier did indeed furnish a new field of oppor- 
tunity, a gate of escape from the bondage of the past; and freshness. 



NATURAL RESOURCES AS ECONOMIC FACTORS 73 

and confidence, and scorn of older society, impatience of its restraints 
and its ideas, and indifference to its lessons have accompanied the 
frontier. What the Mediterranean Sea was to the Greeks, breaking the 
bond of custom, offering new experiences, calling out new institutions 
and activities, that, and more, the ever-retreating frontier has been to 
the United States directly, and to the nations of Europe more remotely. 
And now, four centuries from the discovery of America, at the end of 
a hundred years of life under the Constitution, the frontier has gone, 
and with its going has closed the first period of American history. 

20. AN ILLUSTRATION OF THE LAW OF DIMINISHING 
RETURNS 



A 


B 


C 


D E 



A certain homogeneous strip of land was divided into five equal 
parts. These equal areas had the same exposure to the sun and 
weather, and soil analysis demonstrated that, humanly speaking, 
they were equal in every particular. 

On strip A, the application of 100 doses of labor, capital and 
organization resulted in a yield of 200 bushels of product. 

On strip B the application of 200 doses of precisely the same kinds 
of labor, capital and organization resulted in a yield of 350 bushels. 
This yield was, of course, equivalent to 200 bushels for the first 100 
doses and 150 bushels for the second 100 doses. 

On strip C the application of 300 doses of this labor, capital and 
organization resulted in a yield of 450 bushels of product, or 200 
bushels for the first 100 doses, 150 bushels for the second 100 doses 
and 100 bushels for the third 100 doses. 

On strip D the application of 400 doses of this labor, capital and 
organization yielded 500 bushels of product, or 200 bushels for the 
first 100 doses, 150 bushels for the second 100 doses, 100 bushels 
for the third 100 doses, and 50 bushels for the fourth 100 doses. 

On strip E, the application of 500 doses of this labor, capital and 
organization, resulted in 500 bushels of product. Obviously enough 
the last 100 doses of labor, capital and organization yielded o bushels 
of product; in other words the returns to the last 100 doses had 
diminished to nothing, and the cultivation of the land had reached 
that stage known as maximum returns. 



74 MATERIALS FOR ELEMENTARY ECONOMICS 

21. FACTORS COUNTERACTING DIMINISHING RETURNS' 

There is another agency, in habitual antagonism to the law of 
diminishing return from land; and to the consideration of this we 
shall now proceed. It is no other than the progress of civilization. 
I use this general and somewhat vague expression, because the things 
to be included are so various, that hardly any term of a more restricted 
signification would comprehend them all. 

Of these, the most obvious is the progress of agricultural knowl- 
edge, skill, and invention. Improved processes of agriculture are of 
two kinds: some enable the land to yield a greater absolute produce, 
without an equivalent increase of labor; others have not the power of 
increasing the produce, but have that of diminishing the labor and 
expense by which it is obtained. Among the first are to be reckoned 
the disuse of fallows, by means of the rotation of crops; and the intro- 
duction of new articles of cultivation capable of entering advan- 
tageously into the rotation. The change made in British agriculture 
toward the close of the [eighteenth] century, by the introduction of tur- 
nip husbandry, is spoken of as amounting to a revolution. These im- 
provements operate not only by enabling the. land to produce a 
crop every year instead of remaining idle one year in every two or 
three to renovate its powers, but also by direct increase of its 
productiveness; since the great addition made to the number of 
cattle by the increase of their food affords more abundant manure 
to fertilize the corn lands. Next in order comes the introduction 
of new articles of food containing a greater amount of sustenance, 
like the potato, or more productive species or varieties of the same 
plant, such as the Swedish turnip. In the same class of improve- 
ments must be placed a better knowledge of the properties of ma- 
nures, and of the most effectual modes of applying them; the intro- 
duction of new and more powerful fertilizing agents, such as guano, 
and the conversion to the same purpose, of substances previously 
wasted; inventions like subsoil-ploughing or tile-draining; improve- 
ments in the breed or feeding of laboring cattle; augmented stock of 
the animals which consume and convert into human food what would 
otherwise be wasted ; and the like. The other sort of improvements, 
those which diminish labor, but without increasing the capacity of 
the land to produce, are such as the improved construction of tools; 
the introduction of new instruments which spare manual labor, as the 

' From John Stuart Mill, Prmciples of Political Economy, Book I, chap. xii. 



NATURAL RESOURCES AS ECONOMIC FACTORS 75 

winnowing and threshing machines; a more skilful and economical 
application of muscular exertion, such as the introduction, so slowly 
accomplished in England, of Scotch ploughing, with two horses 
abreast and one man, instead of three or four horses in a team and 
two men, etc. These improvements do not add to the productive- 
ness of the land, but they are equally calculated with the former to 
counteract the tendency in the cost of production of agricultural 
produce, to rise with the progress of population and demand. 

Analogous in effect to this second class of agricultural improve- 
ments, are improved means of communication. Good roads are 
equivalent to good tools. It is of no consequence whether the 
economy of labor takes place in extracting the produce from the soil, 
or in conveying it to the place where it is to be consumed. Not to 
say in addition, that the labor of cultivation itself is diminished by 
whatever lessens the cost of bringing manure from a distance, or facili- 
tates the many operations of transport from place to place which 
occur within the bounds of the farm. Railways and canals are 
virtually a diminution of the cost of production of all things sent to 
market by them; and literally so of all those, the appliances and aids 
for producing which, they serve to transmit. By their means land 
can be cultivated which would not otherwise have remunerated the 
cultivators without a rise of price. Improvements in navigation have, 
with respect to food or materials brought from beyond sea, a corre- 
sponding effect. 

From similar considerations, it appears that many purely mechan- 
ical improvements, which have, apparently at least, no peculiar con- 
nection with agriculture, nevertheless enable a given amount of food 
to be obtained with a smaller expenditure of labor. A great im- 
provement in the process of melting iron, would tend to cheapen 
agricultural implements, diminish the cost of railroads, of wagons 
and carts, ships, and perhaps buildings, and many other things 
to which iron is not at present applied, because it is too costly; 
and would thence diminish the cost of production of food. The same 
effect would follow from an improvement in those processes of what 
may be termed manufacture, to which the material of food is sub- 
jected after it is separated from the ground. The first application of 
wind or water power to grind corn, tended to cheapen bread as much 
as a very important discovery in agriculture would have done; and 
any great improvement in the construction of corn-mills, would have, 
in proportion, a similar influence. The effects of cheapening loco- 



76 MATERIALS FOR ELEMENTARY ECONOMICS 

motion have been already considered. There are also engineering 
inventions which facilitate all great operations on the earth's surface. 
An improvement in the art of taking levels is of importance to drain- 
ing, not to mention canal and railway making. The fens of Holland, 
and of some parts of England, are drained by pumps worked by the 
wind or by steam. Where canals of irrigation, or where tanks or 
embankments are necessary, mechanical skill is a great resource for 
cheapening production. 

There is, thus, no possible improvement in the arts of production 
which does not in one or another mode exercise an antagonistic 
influence to the law of diminishing return to agricultural labor. Nor 
is it only industrial improvements which have this effect. Improve- 
ments in government, and almost every kind of moral and social 
advancement, operate in the same manner. Suppose a country in 
the condition of France before the Revolution: taxation imposed 
almost exclusively on the industrious classes, and on such a principle 
as to be an actual penalty on production; and no redress obtainable 
for any injury to property or person, when inflicted by people of rank 
or court influence. Was not the hurricane which swept away this 
system of things, even if we look no further than to its effect in aug- 
menting the productiveness of labor, equivalent to many industrial 
inventions ? The removal of a fiscal burthen on agriculture, such as 
tithe, has the same effect as if the labor necessary for obtaining the 
existing produce were suddenly reduced one-tenth. The abolition 
of corn laws, or of any other restrictions which prevent commodities 
from being produced where the cost of their production is lowest, 
amounts to a vast improvement in production. When fertile land, 
previously reserved as hunting ground, or for any other purpose of 
amusement, is set free for culture, the aggregate productiveness 
of agricultural industry is increased. It is well known what has 
been the effect in England of badly administered poor laws, and the 
still worse effect in Ireland of a bad system of tenancy, in rendering 
agricultural labor slack and ineffective. No improvements operate 
more directly upon the productiveness of labor than those in the tenure 
of farms, and in the laws relating to landed property. The breaking 
up of entails, the cheapening of the transfer of property, and whatever 
else promotes the natui^al tendency of land in a system of freedom, to 
pass out of hands which can make little of it into those which can 
make more; the substitution of long leases for tenancy at will, and of 
any tolerable system of tenancy whatever for the wretched cottier 



NATURAL RESOURCES AS ECONOMIC FACTORS 77 

system; above all, the acquisition of a permanent interest in the soil 
by the cultivators of it; all these things are as real, and some of them 
as great, improvements in production, as the invention of the spinning 
jenny or the steam engine. 

We may say the same of improvement in education. The intelli- 
gence of the workman is a most important element in the productive- 
ness of labor. So low, in some of the most civilized countries, is the 
present standard of intelligence, that there is hardly any source from 
which a more indefinite amount of improvement may be looked for in 
productive power, than by endowing with brains those who now have 
only hands. The carefulness, economy, and general trustworthiness 
of laborers are as important as their intelligence. Friendly relations, 
and a community of interest and feeling between laborers and employ- 
ers, are eminently so: I should rather say, would be; for I know not 
where any such sentiment of friendly alliance now exists. Nor is it 
only in the laboring class that improvement of mind and character 
operates with beneficial effect even on industry. In the rich and idle 
classes, increased mental energy, more solid instruction, and stronger 
feelings of conscience, public spirit, or philanthropy, would quaUfy 
them to originate and promote the most valuable improvements, 
both in the economical resources of their country, and in its institu- 
tions and customs. To look no further than the most obvious 
phenomena, the backwardness of French agriculture in the precise 
points in which benefit might be expected from the influence of an 
educated class, is partly accounted for by the exclusive devotion of 
the richer landed proprietors to town interests and town pleasures. 
There is scarcely any possible amelioration of human affairs which 
would not, among its other benefits, have a favorable operation, 
direct or indirect, upon the productiveness of industry. The intensity 
of devotion to industrial occupations would indeed in many cases be 
moderated by a more liberal and genial mental culture, but the labor 
actually bestowed on those occupations would almost always be 
rendered more effective. 



22. NATURAL RESOURCES OF THE UNITED STATES, AND 
THEIR CONSERVATION' 

In the growth of the country and the gradual development of its 
natural resources there have been three noteworthy stages. The first 

' Compiled from the Report of Ihc National Conservation Commission (1909). 



78 MATERIALS FOR ELEMENTARY ECONOMICS 

Stage was that of individual enterprise for personal and family bene- 
fit. It led to the conquest of the wilderness. 

The next stage was that of collective enterprise, either for the 
benefit of communities or for the profit of individuals forming the 
communities. It led to the development of cities and states, and too 
often to the growth of great monopolies. 

The third stage is the one we are now entering. Within it the 
enterprise is collective and largely co-operative, and should be directed 
toward the larger benefit of communities, states, and the people 
generally. 

In the first stage, the resources received little thought. In the 
second, they were wastefully used. In the stage which we are enter- 
ing, wise and beneficial uses are essential, and the checking of waste 
is absolutely demanded. 

The wastes which most urgently require checking vary widely in 
character and amount. The most reprehensible waste is that of de- 
struction, as in forest fires, uncontrolled flow of gas and oil, soil 
wash, and abandonment of coal in the mines. This is attributable, 
for the most part, to ignorance, indifference, or false notions of 
economy, to rectify which is the business of the people collectively. 

Nearly as reprehensible is the waste arising from misuse, as in the 
consumption of fuel in furnaces and engines of low efficiency, the 
loss of water in floods, the employment of ill-adapted structural 
materials, the growing of ill-chosen crops, and the perpetuation of 
inferior stocks of plants and animals, all of which may be remedied. 

Reprehensible in less degree is the waste arising from nonuse. 
Since the utilization of any one resource is necessarily progressive 
and dependent on social and industrial conditions and the concurrent 
development of other resources, nonuse is sometimes unavoidable. It 
becomes reprehensible when it affects the common welfare and entails 
future injury. Then, it should be rectified in the general interest. 

For the prevention of waste the most effective means will be found 
in the increase and diffusion of knowledge, from which is sure to 
result an aroused public sentiment demanding prevention. The 
people have the matter in their own hands. They may prevent or 
limit the destruction of resources and restrain misuse through the 
enactment and enforcement of appropriate state and federal laws. 

Wastes reduced and resources saved are the first but not the last 
object of conservation. The material resources have an additional 



NATURAL RESOURCES AS ECONOMIC FACTORS 79 

value when their preservation adds to the beauty and habitability of 
the land. Ours is a pleasant land in which to dwell. To increase 
its beauty and augment its fitness cannot but multiply our pleasure 
in it and strengthen the bonds of our attachment. 

MINERALS 

The mineral production of the United States for 1907 exceeded 
$2,000,000,000, and contributed 65 per cent of the total freight traffic 
of the country. The waste in the extraction and treatment of min- 
eral products during the same year was equivalent to more than 
$300,000,000. 

The production for 1907 included 395,000,000 tons of bituminous 
and 85,000,000 tons of anthracite coal, 166,000,000 barrels of petro- 
leum, 52,000,000 tons of iron ore, 2,500,000 tons of phosphate rock, 
and 869,000,000 pounds of copper. The values of other mineral 
products during the same year included clay products, $162,000,000; 
stone, $71,000,000; cement, $56,000,000; natural gas, $53,000,000; 
gold, $90,000,000; silver, $37,000,000; lead, $39,000,000, and zinc 
$26,000,000. 

The available and easily accessible supplies of coal in the United 
States aggregate, approximately, 1,400,000,000,000 tons. At the 
present increasing rate of production this supply will be so 
depleted as to approach exhaustion before the middle of the next 
century. 

The coal fields are divided, for the sake of convenience in classi- 
fication, into six main provinces, as follows: 

1. The eastern province, containing the anthracite coal fields of 
Pennsylvania and the bituminous coal fields of the Appalachian 
region, i.e., those of western Pennsylvania, Ohio, Virginia, West 
Virginia, Kentucky, Tennessee, Georgia, Alabama, and small out- 
lying areas in North Carolina. 

2. The interior province, containing the bituminous coal- 
producing regions of Michigan, Illinois, Indiana, western Kentucky, 
Iowa, Kansas, Missouri, Oklahoma, Arkansas, and Texas. 

3. The Gulf province, containing the lignite areas of Alabama, 
Mississippi, Louisiana, Arkansas, and Texas. 

4. The northern Great Plains province, containing the lignite 
subbituminous areas of North and South Dakota, eastern Montana 
and northeastern Wyoming. 



8o 



MATERIALS FOR ELEMENTARY ECONOMICS 



5. The Rocky Mountain province, containing the bituminous and 
subbituminous areas of western Montana and western Wyoming, 
Colorado, Utah, and New Mexico. 









0" 





0" 


0" 




8 



0" 






cS 


0" 




o_ 






^§ 

^§ 

0" 
















0" 




















a 
















i. 






, IS 


si 


5.1111 




J- 




If Hi -" 




lliliimiiiiill 




> 


1346 
1847 
1848 
1849 
1850 
1851 
1852 
1853 
1854 
1855 
1856 
1857 
1858 
1859 
1860 
IS6I 
1862 
1863 
1864 
1865 
1866 
1867 
1868 
1869 
1870 
1871 
1372 
IB73 
1874 
1875 
1876 
1877 
1878 
1879 
1880 
1881 
1882 
1883 
1884 
1886 
1886 
1887 
1388 
1839 
1890 
1891 
1892 
189^ 
1394 
1385 
1896 


iisilliiiis 



6. The Pacific coast province, containing the areas of Washington, 
Oregon, and California. 

The known supply of high-grade iron ores in the United States 
approximates 4,788,150,000 tons, which at the present increasing 



NATURAL RESOURCES AS ECONOMIC FACTORS 




82 MATERIALS FOR ELEMENTARY ECONOMICS 

rate of consumption cannot be expected to last beyond the middle of 
the present century. In addition to this, there are assumed to be 
75,116,070,000 tons of lower grade iron ores which are not available 
for use under existing conditions. 

The supply of stone, clay, cement, lime, sand, and salt is ample, 
while the stock of the precious metals and of copper, lead, zinc, 
sulphur, asphalt, graphite, quicksilver, mica, and the rare metals 
cannot well be estimated, but is clearly exhaustible within one to 
three centuries unless unexpected deposits be found. 

The known supply^ of petroleum is estimated at 15,000,000,000 to 
20,000,000,000 barrels, distributed through six separate fields having 
an aggregate area of 8,900 square miles. The production is rapidly 
increasing, while the wastes and the loss through misuse are enor- 
mous. The supply cannot be expected to last beyond the middle of 
the present century. 

The. known natural-gas fields aggregate an area of 9,000 square 
miles, distributed through 22 states. Of the total yield from these 
fields during 1907, 400,000,000,000 cubic feet, valued at $62,000,000, 
were utilized, while an equal quantity was allowed to escape into the 
air. The daily waste of natural gas — the most perfect known fuel 
— is over 1,000,000,000 cubic feet, or enough to supply every city in 
the United States of over 100,000 population. 

Phosphate rock, used for fertilizer, represents the slow accumula- 
tion of organic matter during past ages. In most countries it is 
scrupulously preserved; in this country it is extensively exported, 

'The petroleum fields of the United States are: (i) the Appalachian field, 
extending from western New York to Tennessee; (2) the Lima-Indiana field in 
northwestern Ohio and eastern Indiana; (3) the Illinois field, near the eastern 
edge of the state; (4) the mid-continent field, comprising the pools in Kansas, 
Oklahoma, northwestern Louisiana, and northern Texas; (5) the Gulf field, lying 
mainly in Texas and Louisiana, and (6) the California field. These great fields 
control the industry. West of the mid-continent field and east of the California 
field are several smaller ones (as thus far developed) in Colorado and Wyoming, 
with promises of fields in New Mexico, Utah, Idaho, Montana, Oregon, and 
Washington. In Alaska at least two petroleum pools have been discovered which 
may possibly be capable of considerable output when the market conditions 
become favorable. 

There are many regions in the United States where there is no geological 
improbability of finding petroleum. Such geological improbability exists where 
the rocks are greatly disturbed and broken up to such a depth as to prevent 
probable drilling to the undisturbed sedimentary rocks which could furnish 
good storage for petroleum. 



NATURAL RESOURCES AS ECONOMIC FACTORS 



83 




MATERIALS FOR ELEMENTARY ECONOMICS 



8061 




NATURAL RESOURCES AS ECONOMIC FACTORS 85 

and largely for this reason its production is increasing rapidly. The 
original supply cannot long withstand the increasing demand. 

The consumption of nearly all our mineral products is increasing 
far more rapidly than our population. In many cases the waste is 
increasing more rapidly than the number of our people. In 1776 
but a few dozen pounds of iron were in use by the average family; 
now our annual consumption of high-grade ore is over 1,200 pounds 
per capita. In 181 2 no coal was used; now the consumption is over 
5 tons and the waste nearly 3 tons per capita. 

While the production of coal is increasing enormously, the waste 
and loss in mining are diminishing. At the beginning of our mineral 
development the coal abandoned in the mine was two or three times 
the amount taken out and used. Now the mine waste averages little 
more than half the amount saved. The chief waste is in imperfect 
combustion in furnaces and fire boxes. Steam engines utilize on the 
average about 8 per cent of the thermal energy of the coal. Internal- 
combustion engines utiUze less than 20 per cent, and in electric light- 
ing far less than i per cent of the thermal energy is rendered available. 

With increasing industries new mineral resources become available 
from time to time. Some lignites and other low-grade coals are 
readily gasified and, through the development of internal-combustion 
engines, may be made to check the consumption of high-grade coals. 

Peat is becoming important; it is estimated that 14,000,000,000 
tons are available in the United States. Its value is enhanced because 
of distribution through states generally remote from the fields of 
coal, oil, and natural gas. 

The uses of all our mineral resources are interdependent. This is 
especially true of coal and iron, of which neither can be produced or 
used without aid from the other, and in the production or reduction 
of all other minerals both coal and iron are employed. The same 
standard minerals are necessary to the development of power, of 
which the use is increasing more rapidly than that of any other com- 
modity. 

The building operations of the country now aggregate about 
$1 ,000,000,000 per year. The direct and indirect losses from fire in the 
United States during 1907 approximated $450,000,000, or one-half the 
cost of construction. Of this loss four-fifths, or an average of 
$1,000,000 per day, could be prevented, as shown by comparison with 
the standards of construction and fire losses in the larger European 
countries. 



86 MATERIALS FOR ELEMENTARY ECONOMICS 

So far as the ores are taken from the mines and reduced to metals, 
these resources are capitalized; but after thus being changed to a 
more valuable form they should be so used as to reduce to a minimum 
the loss by rust, electrolytic action, and other wastes. 

There is urgent need for greater safety to the miner. The loss of 
life through mine accidents is appalling, and preventive measures 
cannot be taken too soon. 

The national government should exercise such control of the min- 
eral fuels and phosphate rocks now in its possession as to check waste 
and prolong our supply. 

While the distribution and quantity of most of our important min- 
eral substances are known in a general way, there is imperative need 
for further surveys and investigations and for researches concerning 
the less-known minerals. 

LANDS 

The total land area of continental United States is 1,920,000,000 
acres. Of this but little more than two-fifths is in farms, and less 
than one-half of the farm area is improved and made a source of crop 
production. We have nearly 6,000,000 farms; they average 146 acres 
each. The value of the farms is nearly one-fourth the wealth of the 
United States. There are more than 300,000,000 acres of public graz- 
ing land. The number of persons engaged in agricultural pursuits 
is more than 10,000,000. 

We grow one-fifth of the world's wheat crop, three-fifths of its 
cotton crop, and four-fifths of its corn crop. We plant nearly 50,000,- 
000 acres of wheat annually, with an average yield of about 14 
bushels per acre; 100,000,000 acres of corn, yielding an average of 
25 bushels per acre; and 30,000,000 acres of cotton, yielding about 
12,000,000 bales. 

We had on January i, 1908, 71,000,000 cattle, worth $1,250,000,- 
000; 54,000,000 sheep, worth $211,000,000; and 56,000,000 swine, 
worth $339,000,000. The census of 1900 showed $137,000,000 worth 
of poultry in this country, which produced in 1899, 293,000,000 
dozen eggs; 

There has been a slight increase in the average yield of our great 
staple farm products, but neither the increase in acreage nor the 
yield per acre has kept pace with our increase in population . Within 
a century we shall probably have to feed three times as many people 
as now; and the main bulk of our food supply must be grown on 
our own soil. 



NATURAL RESOURCES AS ECONOMIC FACTORS 



87 




88 MATERIALS FOR ELEMENTARY ECONOMICS 

The area of cultivated land may possibly be doubled. In addition 
to the land awaiting the plow, 75,000,000 acres of swamp land can be 
reclaimed, 40,000,000 acres of desert land irrigated, and millions of 
acres of brush and wooded land cleared. Our population will in- 
crease continuously, but there is a definite limit to the increase of 
our cultivated acreage. Hence we must greatly increase the yield per 
acre. The average yield of wheat in the United States is less than 
14 bushels per acre, in Germany 28 bushels, and in England 32 
bushels. We get 30 bushels of oats per acre, England nearly 45, 
and Germany more than 47. Our soils are fertile, but our mode of 
farming neither conserves the soil nor secures full crop returns. Soil 
fertility need not be diminished, but may be increased. The large 
yields now obtained from farms in Europe which have been cultivated 
for a thousand years prove this conclusively. Proper management 
will double our average yield per acre. The United States can grow 
the farm products needed by a population more than three times 
as great as our country now contains. 

The greatest unnecessary loss of our soil is preventable erosion. 
Second only to this is the waste, nonuse, and misuse of fertilizer 
derived from animals and men. 

The losses to farm products due to injurious mammals is estimated 
at $130,000,000 annually; the loss through plant diseases reaches 
several hundred million dollars; and the loss through insects is reck- 
oned at $659,000,000. The damage by birds is balanced by their 
beneficent work in destroying noxious insects. Losses due to the 
elements are large, but no estimate has been made of them. Losses 
to live stock from these causes are diminishing because of protection 
and feeding during winter. The annual losses from disease among 
domestic animals are: Horses, i . 8 per cent; cattle, 2 per cent; sheep, 
2 . 2 per cent, and swine, 5 . i per cent. Most of these farm losses are 
preventable. 

' There is a tendency toward consolidation of farm lands. The esti- 
mated area of abandoned farms is 16,000 square miles, or about 3 
per cent of the improved land. The causes of abandonment differ 
in different parts of the country. Where most prevalent, it is caused 
principally by erosion and exhaustion of the soil. 

The product of the fisheries of the United States has an annual 
value of $57,000,000. Fish culture is carried on by the nation and 
the states on an enormous scale. Most of the more important food 
species are propagated, and several species are maintained in that 



NATURAL RESOURCES AS ECONOMIC FACTORS 



89 



way. Fish from forest waters furnish $21,000,000 worth of food 
yearly, a supply dependent on the preservation of the forests. 



IOWA 

ILLINOIS 

OHIO 

INDIANA 

DELAWARE 

MARYLAND 

KENTUCKY 

MISSOURI 

NEW YORK 

KANSAS 

PENNSYLVANIA 

NEW JERSEY 

VIRGINIA 

TENNESSEE 

NEBRASKA 

VERMONT 

WEST VIRGINIA 

MINNESOTA 

CONNECTICUT 

MICHIGAN 

WISCONSIN 

SOUTH CAROLINA 

GEORGIA 

RHODE ISLAND 

NORTH CAROLINA 

ALABAMA 

MISSISSIPPI 

MASSACHUSETTS 

SOUTH DAKOTA 

NORTH DAKOTA 

ARKANSAS 

OKLAHOMA 

NEW HAMPSHIRE 

LOUISIANA 

DIST. OF COLUMBIA 

CALIFORNIA 

TEXAS 

WASHINGTON 

OREGON 

FLORIDA 

COLORADO 

IDAHO 

UTAH 

MONTANA 

WYOMING 

NEVADA 

NEW MEXICO 

ARIZONA 



PERCENTAGE OF IMPROVED LAND TO TOTAL AREA. 

_ 10 20 30 40 50 60 70 80^_ 



^^^^^^^^^^^====^= 



Our wild game and fur-bearing animals have been largely ex- 
terminated. To prevent their complete extinction the states and the 



90 MATERIALS FOR ELEMENTARY ECONOMICS 

United States have taken in hand their protection, and their numbers 
are now increasing. Forest game yields over $10,000,000 worth of 
food each year. 

With game birds the story is much the same — wanton destructions 
until the number has been greatly reduced, followed in recent years 
by wise protection, which in some cases allows the remnant to survive 
and even to increase. 

Each citizen of the United States owns an equal undivided interest 
in about 387,000,000 acres of public lands, exclusive of Alaska and 
the insular possessions. Besides this there are about 235,000,000 
acres of national forests, national parks, and other lands devoted to 
public use. 

Good business sense demands that a definite land policy be formu- 
lated. The National Conservation Commission believes that the fol- 
lowing will serve as a basis therefor: 

1. Every part of the public lands should be devoted to the use 
which will best subserve the interests of the whole people. 

2. The classification of all public lands is necessary for their ad- 
ministration in the interests of the people. 

3. The timber, the minerals, and the surface of the public lands 
should be disposed of separately. 

4. Public lands more valuable for conserving water supply, timber, 
and natural beauties or wonders than for agriculture should be held 
for the use of the people from all except mineral entry. 

5. Title to the surface of the remaining nonmineral public lands 
should be granted only to actual home makers. 

6. Pending the transfer of title to the remaining public lands they 
should be administered by the government and their use should be 
allowed in a way to prevent or control waste and monopoly. 

The present public-land laws as a whole do not subserve the best 
interests of the nation. They should be modified so far as may be 
required to bring them into conformity with the foregoing outline of 
policy. 

FORESTS 

Next to our need of food and water comes our need of timber. 

Our industries which subsist wholly or mainly upon wood pay the 
wages of more than 1,500,000 men and women. 

Forests not only grow timber, but they hold the soil and they con- 
serve the streams. They abate the wind and give protection from 



NATURAL RESOURCES AS ECONOMIC FACTORS 



91 




92 MATERIALS FOR ELEMENTARY ECONOMICS 

excessive heat and cold. Woodlands make for the fiber, health, and 
happiness of the citizen and the nation. 

Our forests now cover 550,000,000 acres, or about one-fourth of the 
United States. The original forests covered not less than 850,000,000 
acres. 

Forests pubKcly owned contain one-fifth of all our standing timber. 
Forests privately owned contain four-fifths of the standing timber. 
The timber privately owned is not only four times that publicly 
owned, but is generally more valuable. 

Forestry is now practiced on 70 per cent of the forests publicly 
owned and on less than i per cent of the forests privately owned, or 
on only 18 per cent of the total area of forests. 

The yearly growth of wood in our forests does not average more 
than 12 cubic feet per acre. This gives a total yearly growth of less 
than 7,000,000,000 cubic feet. 

We have 200,000,000 acres of mature forests, in which yearly 
growth is balanced by decay; 250,000,000 acres partly cut over or 
burned over, but restocking naturally with enough young growth to 
produce a merchantable crop, and 100,000,000 acres cut over and 
burned over, upon which young growth is lacking or too scanty to 
make merchantable timber. 

We take from our forests yearly, including waste in logging and in 
manufacture, 23,000,000,000 cubic feet of wood. We use each year 
100,000,000 cords of firewood; 40,000,000,000 feet of lumber; more 
than 1,000,000,000 posts, poles, and fence rails; 118,000,000 hewn ties; 
1,500,000,000 staves; over 133,000,000 sets of heading; nearly 500,- 
000,000 barrel hoops; 3,000,000 cords of native pulp wood; 165,000,- 
000 cubic feet of round mine timbers, and 1,250,000 cords of wood for 
distillation. 

Since 1870 forest fires have destroyed a yearly average of 50 lives 
and $50,000,000 worth of timber. Not less than 50,000,000 acres of 
forest is burned over yearly. The young growth destroyed by fire is 
worth far more than the merchantable timber burned. 

One-fourth of the standing timber is lost in logging. The boxing 
of long-leaf pine for turpentine has destroyed one-fifth of the forests 
worked. The loss in the mill is from one-third to two-thirds of the 
timber sawed. The loss of mill product in seasoning and fitting for 
use is from one-seventh to one-fourth. 

Of each 1,000 feet which stood in the forest, an average of only 
320 feet of lumber is used. 



NATURAL RESOURCES AS ECONOMIC FACTORS 



93 



We take from our forests each year, not counting the loss by fire, 
three and a half times their yearly growth. We take 40 cubic feet 
per acre for each 12 cubic feet grown; we take 260 cubic feet per 
capita, while Germany uses 37 and France 25 cubic feet. 

We tax our forests under the general property tax, a method aban- 
doned long ago by every other great nation. Present tax laws pre- 
vent reforestation of cut-over land and the perpetuation of existing 
forests by use. 

Great damage is done to standing timber by injurious forest insects. 
Much of this damage can be prevented at small expense. 

To protect our farms from wind and to reforest land best suited 
for forest growth will require tree planting on an area larger than 



RELATIVE LUMBER PRODUCTION 
IN TEN STATES IN 1880 AND 1907 



1880 




1307 




Hmich. 




33" 




4.5V. 


asv. 


PA. 


4.3% 


^P 


WIS 


6.0% 


6i5'/. 


N.Y. 


■ 
2.1-/. 


L8% 


TEX 


5.5V. 


i.or. 


ARK 


4.9% 


.9% 


WASH. 1 


9. 4% 


.9% 


MISS. 


3.2U 


.7X 


U. 


7.4% 


W/4 


ORE. 


4.1% 



BILLIONS BOARD FEET 

5 10 15 20 25 30 35 40 


1850 

I860 
1870 
1880 
1900 
1907 




1 




















■ 







































Pennsylvania, Ohio, and West Virginia combined. Lands so far suc- 
cessfully planted make a total area smaller than Rhode Island; and 
year by year, through careless cutting and fires, we lower the capacity 
of existing forests to produce their like again, or else totally destroy 
them. 

In spite of substitutes we shall always need much wood. So far 
our use of it has steadily increased. The condition of the world's 
supply of timber makes us already dependent upon what we produce. 
We send out of our country one and a half times as much timber as 
we bring in. Except for finishing woods, relatively small in amount, 
we must grow our own supply or go without. Until we pay for our 
lumber what it costs to grow it, as well as what it costs to log and 
saw, the price will continue to rise. 



94 



MATERIALS FOR ELEMENTARY ECONOMICS 



The preservation by use, under the methods of practical forestry, 
of all public forest lands, either in state or federal ownership, is 
essential to the permanent public welfare. In many forest states 
the acquirement of additional forest lands as state forests is neces- 
sary to the best interests of the states themselves. 

The conservation of our mountain forests, as in the Appalachian 
system, is a national necessity. These forests are required to aid in 
the regulation of streams used for navigation and other purposes. 
The conservation of these forests is impracticable through private 
enterprise alone, by any state alone, or by the federal government 



FOREST PRODUCTS IN 

CUSSES 

FIREWOOD. 

LUMBER AND SHINGLES 

POLES, POSTS. AND RAILS 


1907. 

FOREST MATERIAL REQUIREC 
BILLIONS or CUBIC FEET 


1 














■ 








\ 




^ 


















HEWED CROSS-TIES 


■ 
1 

1 


■ 


COOPERAGE STOCK 

PULP-WOOD 


ROUND MINE TIMBERS 


DISTILLATION WOOD 






-== 



alone. Effective and immediate co-operation between these three 
agencies is essential. Federal ownership of limited protective areas 
upon important watersheds, effective state fire patrol, and the co- 
operation of private forest owners are all required. 

The true remedy for unwise tax laws lies not in laxity in their 
application nor in special exemptions, but in a change in the method 
of taxation. An annual tax upon the land itself, exclusive of the 
value of the timber, and a tax upon the timber when cut, is well 
adapted to actual conditions of forest investment, and is practicable 
and certain. It is far better that forest land should pay a moderate 
tax permanently than that it should pay an excessive revenue tem- 
porarily and then cease to pay at all. 



NATURAL RESOURCES AS ECONOMIC FACTORS 



95 



Forests in private ownership cannot be conserved unless they are 
protected from fire. We need good fire laws, well enforced. Fire 
control is impossible without an adequate force of men whose sole 
duty is fire patrol during the dangerous season. 

The conservative use of the forest and of timber by American 
citizens will not be general until they learn how to practice forestry. 
Through a vigorous national campaign in education, forestry has 
taken root in the great body of American citizenship. The basis 



sPEcies 

YELLOW PINE 

DOUGLAS FIR 

WHITE PINE 

OAK 

HEMLOCK 

SPRUCE 

WESTERN PINE 

MAPLE 

POPLAR 

CrpRESS 

RED GUM 

CHESTNUT 

REDWOOD 

BEECH 

BIRCH 

BASSWOOO 

COTTONWOOD 

ELM 

ASH 

CEDAR 

LARCH 

HICKORT 

WHITE FIR 

SUGAR PINE 

TAMARACK 

TUPELO 

SYCAMORE 

WALNUT 

ALL OTHERS 



LUMBER CUT Bf SPECIES 1907. 

BILLIONS OF BOARD FEET. 



^" 




^ 


^" 




















■ 








^^" 




^™ 




"^ 


"™^ 




'—' 




^" 


™ 


^^™ 








. 


I 


1 




_ 


^0 


J 





already exists upon which to build a structure of forest conservation 
which will endure. This needs the definite commitment of state 
governments and the federal government to their inherent duty 
of teaching the people how to care for their forests. The final re- 
sponsibility, both for investigative work in forestry and for making 
its results known, rests upon the states and upon the nation. 

By reasonable thrift, we can produce a constant timber supply 
beyond our present need, and with it conserve the usefulness of our 
streams for irrigation, water supply, navigation, and power. 



96 MATERIALS FOR ELEMENTARY ECONOMICS 

Under right management our forests will yield over four times as 
much as now. We can reduce waste in the woods and in the mill at 
least one-third, with present as well as future profit. We can per- 
petuate the naval-stores industry. Preservative treatment will reduce 
by one-fifth the quantity of timber used in the water or in the ground. 
We can practically stop forest fires at a cost yearly of one-fifth the 
value of the merchantable timber burned. 

We shall suffer for timber to meet our needs until our forests have 
had time to grow again. But if we act vigorously and at once we 
shall escape permanent timber scarcity. 

WATERS 

The sole source of our fresh water is rainfall, including snow. 
From this source all running, standing, and ground waters are 
derived. The habitability of the country depends on these waters. 
Our mean annual rainfall is about 30 inches; the quantity about 
215,000,000,000,000 cubic feet per year, equivalent to ten Mississippi 
rivers. 

Of the total rainfall, over half is evaporated; about a third flows 
into the sea; the remaining sixth is either consumed or absorbed. 
These portions are sometimes called, respectively, the fly-off, the 
run-off, and the cut-off. They are partly interchangeable. About a 
third of the run-off, or a tenth of the entire rainfall, passes through 
the Mississippi. The run-off is increasing with deforestation and 
cultivation. 

Of the 70,000,000,000,000 cubic feet annually flowing into the sea, 
less than i per cent is retained and utilized for municipal and com- 
munity supply; less than 2 per cent (or some 10 per cent of that in 
the arid and semi-arid regions) is used for irrigation; perhaps 5 per 
cent is used for navigation, and less than 5 per cent for power. 

For municipal and community water supply there are protected 
catchment areas aggregating over 1,000,000 acres, and over $250,- 
000,000 are invested in waterworks, with nearly as much more in the 
appurtenant catchment areas and other lands. The population so 
supplied approaches 10,000,000, and the annual consumption is about 
37,500,000,000 cubic feet. The better managed systems protect the 
catchment areas by forests and grass ; the water is controlled and the 
storm product used, but there is large waste after the water enters 
the mains. 



NATURAL RESOURCES AS ECONOMIC FACTORS 



97 




rt en 






C (U 



•7 -e."-^ 



>% 

rt 
& 



qS materials for elementary economics 

For irrigation it is estimated that there are $200,000,000 invested 
in dams, ditches, reservoirs, and other works for the partial control 
of the waters, and that 1,500,000,000,000 cubic feet are annually 
diverted to irrigable lands, aggregating some 20,000 square miles. 
Except in some cases through forestry, few catchment areas are con- 
trolled, and few reservoirs are large enough to hold the storm waters. 
The waste in the public and private projects exceeds 60 per cent, 
while no more than 25 per cent of the water actually available for 
irrigation of the arid lands is restrained and diverted. 

There are in continental United States 287 streams navigated for 
an aggregate of 26,226 miles, and as much more navigable if im- 
proved. There are also 45 canals, aggregating 2,189 miles, besides 
numerous abandoned canals. Except through forestry in recent 
years, together with a few reservoirs and canal locks and movable 
dams, there has been little effort to control headwaters or catchment 
areas in the interests of navigation, and none of our rivers are navi- 
gated to more than a small fraction even of their effective low-water 
capacity. 

The water power now in use is 5,250,000 horse-power; the amount 
running over government dams and not used is about 1,400,000 horse- 
power; the amount reasonably available equals or exceeds the entire 
mechanical power now in use, or enough to operate every mill, drive 
every spindle, propel every train and boat, and light every city, town, 
and village in the country. While the utilization of water-power 
ranks among our most recent and most rapid industrial developments, 
little effort has been made to control catchment areas or storm waters 
in any large way for power, though most plants effect local control 
through reservoirs and other works. Nearly all the freshet and flood 
water runs to waste, and the low waters which limit the efficiency of 
power plants are increasing in frequency and duration with the in- 
creasing flood run-off. 

The practical utility of streams for both navigation and power is 
measured by the effective low-water stage. The volume carried when 
the streams rise above this stage is largely wasted and often does 
serious damage. The direct yearly damage by floods since 1900 has 
increased steadily from $45,000,000 to over $238,000,000. The indi- 
rect loss through depreciation of property is great, while a large loss 
arises in impeded traffic through navigation and terminal transfers. 

The freshets are attended by destructive soil erosion. The soil 
matter annually carried into lower rivers and harbors or into the sea 



NATURAL RESOURCES AS ECONOMIC FACTORS 



99 



.i>, ^A ^\ ^ ^ ^z:^ \ ^ I^t.^'-f ^Tl 


3 






■^»^^^^--^>^_~ \ ^--^'^ \ »5 ; Ass- ^j»-\r \ \ _-V- — -^i \ \ J i^ r- 


"s 


'S~~~-A 7^«Cw»™'4'3L-'-»i3Ss-f^ \ \ 1— - — \ \ > \ L,-.r-^TFr 




nr^w^\^^2SipS*^^-W ^-— A — "l^ \ \_-— V-'\?^^W 


. 


y""'^ ^yl3^^^fe'^il^^?^i^?S^\lovPi U _A — — \ \ *- a"^ V . 


" 


!(^ J^fe^lc/^^^ \ \ Jl— -^^^ 




'^ /L-'-t^X ^^^V- ^tf^'^^^^i^^t » yvV^^S^^T^^«jA \ N^ \ \ A— — — "^ \ 


fe 


^ "^r^-/ \ ^•-ir^^^^' x\ f i7^^\& ^^-t-^if^^vV/^ 1 1 iTv \ /^\ \ _— -^^"' — ^ V \ \ 




^^-■^^^-"^^-----1 VXJi^^'^^^ '^^-SLIl4-'^^^y^^A7 \ \ .^^^^I^^^Vn^ ^ 


S 




i: 


^T^itr^^^^»^^0PWYJr^^^M- ^ 






s 


-— ■^ »^Jjf W^ A>-X---''"V\^vl\\ *^ ^^ ' li^i^^^^r^^ — IS^^^T'^/ \ 1 1 


is 




& 
i 




D^ 


ki T - 




\ .J'^T^ « \_l->Sc-ir**^'^T^_^(i^M<ai[^Zjt^^ 


-'O-^'l' 


-0 — 


t 


4:rir?^K^S^^^^^^^SyM^r:^^ \ 




\xi^^^h^!A^^^^^5^^^^^^^,M^ ^ 


% 






•* 




^^^J^l^YW^ 


V^^ 


^1 


o 


b 






-^^^--pvcr^^ 




9 




















"s ^-^n Y*e s-a^ 


1 7'* Ul^'i/fT 1 3?"^'^' '■^" 


ifi 


ff- ^ 


j^^-"-. 




i! 


Si 


^ 


— Wa-4?-iigi;3 — — ^ 


r£^^^^\ % i^i 


Kl^ 


^ 


V!: 


^ o 


5 

1 


<iij, 


¥¥ 


"'irjr l%(f\J)^h 




li 


^ 


7%, 


^ 


% 


S! 


7 




W?BW; 


-jK 




?;. 


P2 


T 


1! 


/ 


4^-^"T 


^£rw443ifrV 


1 ' 


/"^ 


^ 


^7^rf-n 


\ 


//J-- ^sJ^2^~^^J3^'~%~i^?^ — j4 --V- 


)-l - - 


...Si 


rl 


a 


■1 


\ 


?-^ ^^^^^^^^^^:^^ ^ "^ 


^ 


. 


a1 


\ 


r~~-~2~^5W^^^3/T7^i^^~^ 


MMs^' 




f V y/y ThT ) 7 — wt-^YH^rJ/ / v/f ^^^^ TT^ L^^ ~ 1 


■ 


r — ^7— -^jf__ jT^ lie -' - ■/ '—-rr'"^ — — ^TTi— .„^_jT 'jL ( \ J ^T ^.^ r / ^i ^ — ■~^tr' Bi 


L 


\ jr7'^w------i,^^ K nL L^ i 


B 


Tt~4~-~^v^i'T^^^/^''**^'^=:^^^\^^ 'Y^)r^'Tr^H^\T^«r?4 J 


^ 


r>^^^^];T|^^^^^lfc^ 




'^^^^^T^^^^^^^^^'^r^^^X 


b 


^^^ T' 




7i>-^^^^^_a3^-v~..._^a ~^^h^~~UM^ \^^^^^i^^j~~~'~~l—% 


b 


f^^K^fC^M T^'i^slj' M l^^^^^i f — ~^^^y)i^J y^ J ^ ..i/ 'f^^ — iSf— -''*'''/ III 


^ 


?^Wz^?^^ / — r^—i-t 


S 


^^^^^f^-^^^^^t^^^^^^^^^Ui^f~~~^^ 


r^^SMr^^^:^^^^^^^o/ 1 / — ^ 


S 


^ T^W W^W^^ /r-- / — // ^ / — 1 



< -f! 



P^ rt 



lOO MATERIALS FOR ELEMENTARY ECONOMICS 

is computed at 783,000,000 tons. Soil wash reduces by 10 or 20 per 
cent the productivity of upland farms and increases channel cutting 
and bar building in the rivers. The annual loss to the farms alone 
is fully $500,000,000, and large losses follow the fouling of the waters 
and the diminished navigability of the streams. 

Through imperfect control of the running waters lowlands are tem- 
porarily or permanently flooded. It is estimated that there are in 
mainland United States about 75,000,000 acres of overflow and swamp 
lands requiring drainage; that by systematic operation these can be 
drained at moderate expense, and that they would then be worth two 
or three times the present value and cost of drainage, and would fur- 
nish homes for 10,000,000 people. 

It is estimated that the quantity of fresh water stored in lakes and 
ponds (including the American portion of the Great Lakes) is about 
600,000,000,000,000 cubic feet, equivalent to three years' rainfall or 
eight years' run-off. Some 6,000,000 of our people draw their water 
supply from lakes. 

A large part of that half of the annual rainfall not evaporated 
lodges temporarily in the soil and earth. It is estimated that the 
ground water to the depth of 100 feet averages i6| per cent of the 
earth volume, or over 1,400,000,000,000,000 cubic feet, equivalent to 
seven years' rainfall or twenty years' run-off. This subsurface reser- 
voir is the essential basis of agriculture and other industries and is 
the chief natural resource of the country. It sustains forests and all 
other crops and supplies the perennial springs and streams and wells 
used by four-fifths of our population and nearly all our domestic 
animals. Its quantity is diminished by the increased run-off due to 
deforestation and injudicious farming. Although the volume of the 
available ground water is subject to control by suitable treatment 
of the surface, little effort has been made to retain or increase it, and 
it is probable that fully 10 per cent of this rich resource has been 
wasted since settlement began. The water of the strata below 100 feet 
supplies artesian and deep wells, large springs, and thermal and mineral 
waters. It can be controlled only through the subsurface reservoir. 

Of the 35,000,000,000,000 cubic feet of cut-off, the chief share is 
utilized by natural processes or by agriculture and related industries. 
On an average the plant tissue of annual growths is three-fourths and 
of perennial growths three-eighths water; of human and stock food 
over 80 per cent is water, and in animal tissue the ratio is about the 
same; and since water is the medium for organic circulation, the 



NATURAL RESOURCES AS ECONOMIC FACTORS loi 

plants and animals of the country yearly require an amount many 
times exceeding their aggregate volume. Even in the more humid 
sections of the country the productivity of the soil and the possible 
human population would be materially increased by a greater rain- 
fall, leaving a larger margin for organic and other chemical uses. 
Except through agriculture and forestry little general effort is made 
to control the annual cut-off, although some farmers in arid regions 
claim to double or triple the crop from given soil by supplying water 
just when needed and withholding it when not required. 

Water is like other resources in that its quantity is limited. It 
differs from such mineral resources as coal and iron, which once 
used are gone forever, in that the supply is perpetual; and it differs 
from such resources as soils and forests, which are capable of re- 
newal or improvement, in that it cannot be augmented in quantity, 
though like all other resources it can be better utilized. 

The inventory of our natural resources made by your commission 
with the vigorous aid of all federal agencies concerned, of many 
states, and of a great number of associated and individual co-op- 
erators, furnishes a safe basis for general conclusions as to what we 
have, what we use and waste, and what may be the possible saving. 
But for none of the great resources of the farm, the mine, the forest, 
and the stream do we yet possess knowledge definite or wide enough 
to insure methods of use which will best conserve them. 

In order to conserve a natural resource, we must know what 
that resource is by taking stock. We greatly need a more complete 
inventory of our natural resources; and this cannot be made except 
through the active co-operation of the states with the nation. 

The permanent welfare of the nation demands that its natural 
resources be conserved by proper use. To this end the states and the 
nation can do much by legislation and example. By far the greater 
part of these resources is in private hands. Private ownership of 
natural resources is a public trust; they should be administered in 
the interests of the people as a whole. The states and nation should 
lead rather than follow in the conservative and efficient use of prop- 
erty under their immediate control. But their first duty is to gather 
and distribute a knowledge of our natural resources and of the means 
necessary to insure their use and conservation, to impress the body of 
the people with the great importance of the duty, and to promote the 
co-operation of all. No agency, state, federal, corporate, or private, 
can do the work alone. 



I02 MATERIALS FOR ELEMENTARY ECONOMICS 

Finally, the conservation of our resources is an immediate and 
vital concern. Our welfare depends on conservation. The pressing 
need is for a general plan under which citizens, states, and nation 
may unite in an effort to achieve this great end. The lack of co- 
operation between the states themselves, between the states and the 
nation, and between the agencies of the national government, is 
a potent cause of the neglect of conservation among the people. An 
organization through which all agencies — state, national, municipal, 
associate, and individual — may unite in a common effort to conserve 
the foundations of our prosperity is indispensable to the welfare and 
progress of the nation. To that end the immediate creation of a. 
national agency is essential. Many states and associations of citizens 
have taken action by the appointment of permanent conservation 
commissions. It remains for the nation to do likewise, in order that 
the states and the nation, associations and individuals, may join 
in the accomplishment of this great purpose. 

23. THE ECONOMIC POSSIBILITIES OF CONSERVATION' 

The real heart of the conservation problem presents an issue 
which taxes the resources of economic theory to the utmost. This 
issue is the problem of adjusting the conflict between the interest of 
present and future. In America the possibilities of conservation have 
been considered largely from the standpoint of natural science, while 
the economic limitations have been but little appreciated. 

It is first necessary to determine the relation between the utiliza- 
tion of natural resources and their exhaustion. If utilization did not 
result in exhaustion, the problem of conservation, as it was stated 
above, obviously would not exist. Accordingly, natural resources 
may be classified as follows : 

I. Resources which exist in such abundance that there is no apparent 
necessity for economy, either in present or future; for instance, water 
in some localities. 
II. Resources which will probably become scarce in the remote future, 
although so abundant as to have no market value in the present ; for 
instance, building stone and sand in some localities. 
III. Resources which have a present scarcity — 

1. Not exhaustible through normal use : water-powers. 

2. Necessarily exhausted through use, and non-restorable after 
exhaustion: mineral deposits. 

'Adapted from L. C. Gray, "The Economic Possibilities of Conservation" in 
the Quarterly Journal of Economics, XXVII, 499-509 (May, 1913). 



NATURAL RESOURCES AS ECONOMIC FACTORS 103 

3. Necessarily exhausted through use, but restorable: forests, fish. 

4. Exhaustible in a given locality but restorable through the 
employment of other resources of a different kind or of similar 
resources in different locations: agricultural land. 

Is private property in natural objects favorable or unfavorable to 
the realization of the ideals of the conservationist ? Whether or not 
the individual will pursue a policy of exploitation or one of conserva- 
tion, depends on a number of conditions, the most important of which 
are the rate of interest, the law of diminishing productivity, and the 
value of the natural resources under the individual's control. 

The influence of the rate of interest may be illustrated by the 
motives which govern the owner of a coal mine in the utilization of his 
property. Were it possible to remove all of this content in the present 
as cheaply as over a period of time, the owner would most certainly do 
so. This is true because the proceeds from the sale of the product 
may be put out at interest, whereas the mineral yields no interest so 
long as it remains unsold. It is assumed, of course, that no changes 
in the price of the product are anticipated. 

The owner is prevented, however, from the immediate appropria- 
tion of the entire valuable content because the removal of the product 
is subject to the law of diminishing productivity. After a certain rate 
of removal is achieved, an increase in that rate results in a smaller 
return per unit of expense. By postponing the extraction of this 
additional coal until some future period, the owner of the mine can 
remove the entire content at a minimum expense. 

The rate of extraction of the coal which will be most profitable to 
the owner is necessarily a rate between the two extremes which have 
just been explained. If the interest rate is high, the postponement of 
removal until a future period becomes less profitable than would be 
the case under a lower rate of interest. The greater amount of 
interest which may be secured from the realized product more than 
balances the loss from diminishing returns through an increase in the 
rate of present removal. Thus the general effect of a high interest 
rate, other things being equal, is rapid exploitation; whereas a lower 
interest rate makes a policy of conservation more profitable to 
the owner. 

The market value of the natural resource influences the rate of 
utilization in several ways. In the first place, the rise of value 
increases the amount of land that may be profitably utilized. It 
becomes profitable to farm new areas, to sink shafts in mineral deposits 
which it would not have been profitable to mine under the lower level 



I04 MATERIALS FOR ELEMENTARY ECONOMICS 

of prices, and to seek lower levels in the old shafts. In short, the 
result of the increase in value is to increase rapidity of utilization by 
stimulating the appropriation of resources hitherto not subject to use, 
thereby intensifying the drain upon the supply of natural resources. 

The second result of the increase in value is to encourage a more 
intensive utilization of the resources formerly employed. Does this 
mean conservation or more rapid utilization? There has been a 
widespread belief that an intensive use of land is a conservative use 
and that high land values will result in a cessation of soil mining. In 
general, however, a more intensive use implies merely the association 
of a relatively large amount of labor and capital with a given surface 
of land. A larger amount of labor and capital associated with a given 
surface may mean a more rapid utilization ot the content of the land 
than under more extensive methods. It may mean deeper plowmg, 
more frequent cultivation, larger harvests, more rapid exhaustion. 

There are several reasons, however, which justify the view that 
utilization will tend to be exploitative when land is cheap, and con- 
servative when it is dear. In the first place, conservation frequently 
requires a present expenditure in order to prevent the waste or 
deterioration of the residuum of resources not immediately needed. 
For instance, it may be possible to retard the erosion of the soil by 
present expenditures in terracing and drainage. The economic 
problem involved is the balancing of present expenditures against 
future benefits. The more valuable the natural resource, the more 
likely is the owner to pursue a policy which will prevent the waste of 
the land by utilization or otherwise. Moreover the rate of discount on 
the future plays an influential role in this phase of conservation as in 
others ; for the higher the rate, the smaller is the present value of the 
expected benefits to be balanced against the requisite present expense. 

In the second place, high value of a natural object is favorable to 
conservation because a tendency results for other less valuable 
resources to be substituted in place of it. 

The effect, therefore, of the rise in the value of natural resources 
is twofold: first, to increase the quantity of resources that are brought 
under utilization; and second to create motives for economizing those 
already in use. In the one direction the influence is favorable to 
conservation; in the other direction, unfavorable. 

If we widen our point of view and consider utilization and 
conservation from the standpoint of society, the explanation of the 
paradox just noted will be seen to arise from the conditions which 
determine market value. 



IV. HUMAN BEINGS AS ECONOMIC FACTORS 
24. SOME DEFINITIONS OF LABOR 

"Labor is a wealth-creating effort " — J. B. Clark, Essen- 
tials of Economic Theory, chap. i. 

"The term labor .... includes all human exertion " 

— Henry George, Progress and Poverty, Book I, chap. ii. 

"Labor is any human effort having an aim or purpose outside 
of itself." — F. A. Fetter, The Principles of Economics, chap. xx. 

"Labor is the application of human faculties to the production 
of wealth." — A. S. Johnson, Introduction to Economics, chap. x. 

"Labor is the voluntary exertion of bodily or mental faculties 
for the purpose of production." — N. W. Senior, Political Economy. 

"We may define labor as any exertion of mind or body under- 
gone partly or wholly with a view to some good other than the 
pleasure derived directly from the work." — Alfred Marshall, Principles 
of Economics, Book II, chap. iii. 

"Labor may be properly defined any sort of action or operation, 
whether performed by man, the lower animals, machinery, or natural 
agents, that tends to bring about any desirable result." — J. R. 
M'Culloch, Supplemental Note I to Smith's Wealth of Nations. 

"Labor, i. Exertion of the faculties of the body or mind, 
especially when painful or compulsory ; bodily or mental toil. 

"2. Physical exertion directed to the supply of the material 
wants of the community; the specific service rendered to production 
by the laborer and artisan." — Murray, New English Dictionary. 

"Labor is .... a process in which both man and Nature 
participate, and in which man of his own accord starts, regulates, 
and controls the material reactions between himself and Nature. 
He opposes himself to Nature as one of her own forces, setting in 
motion arms and legs, head and hands, the natural forces of his 
body, in order to appropriate Nature's productions in a form adapted 
to his own wants." — Karl Marx, Capital (Engel's translation), 
Vol. I, chap. vii. 

"Labor is either bodily or mental; or, to express the distinction 
more comprehensively, either muscular or nervous; and it is necessary 



I06 MATERIALS FOR ELEMENTARY ECONOMICS 

to include in the idea, not solely the exertion itself, but all feelings 
of a disagreeable kind, all bodily inconvenience or mental annoyance, 
connected with the employment of one's thoughts, or muscles, or 
both, in a particular occupation 

"Labor .... in the physical world, is always and solely 
employed in setting objects in motion ; the properties of matter, the 
laws of nature, do the rest."— John Stuart Mill, Principles of Political 
Economy, Book I, chap. i. 

"Labor is the contest of the life of man with an opposite; — the 
term 'life' including his intellect, soul and physical power, contend- 
ing with question, difficulty, trial, or material force 

". ... it is the quantity of ... . loss, or failure of human 
life, caused by any effort. It is usually confused with effort itself, 
or the application of power .... but there is much effort which is 
merely a mode of recreation, or of pleasure. The most beautiful 
actions of the human body, and the highest results of the human 
intelligence, are conditions, or achievements, of quite unlaborious, — 

nay, of recreative, — effort. But labor is the suffering in effort " 

John Ruskin, Unto This Last, §70, and Munera Pulveris, §59. 

25. THE RELATION OF LABOR TO NATURAL AGENTS IN 
PRODUCTION' 

Cases in which a certain amount of labo*r has been dispensed with, 
its work being devolved upon some natural agent, are apt to suggest 
an erroneous notion of the comparative functions of labor and natural 
powers; as if the co-operation of those powers with human industry 
were limited to the cases in which they are made to perform what 
would otherwise be done by labor; as if, in the case of things made 
(as the phrase is) by hand. Nature only furnished passive materials. 
This is an illusion. The powers of Nature are as actively operative 
in the one case as in the other. A workman takes a stalk of the 
flax or hemp plant, splits it into separate fibers, twines together 
several of these fibers with his fingers, aided by a simple instrument 
called a spindle; having thus formed a thread, he lays many such 
threads side by side, and places other similar threads directly across 
them, so that each passes alternately over and under those which 
are at right angles to it; this part of the process being facilitated by 
an instrument called a shuttle. He has now produced a web of cloth, 

' From John Stuart Mill, Principles of Political Economy, Book I, chap, i, § 2. 



HUMAN BEINGS AS ECONOMIC FACTORS 107 

either linen or sack-cloth, according to the material. He is said to 
have done this by hand, no natural force being supposed to have 
acted in concert with him. But by what force is each step of this 
operation rendered possible, and the web, when produced, held 
together ? By the tenacity, or force of cohesion, of the fibers: which 
is one of the forces of Nature, and which we can measure exactly 
against other mechanical forces, and ascertain how much of any of 
them it suffices to neutralize or counterbalance. 

If we examine any other case of what is called the action of man 
upon Nature, we shall find in like manner that the powers of Nature, 
or in other words the properties of matter, do all the work, when 
once objects are put into the right position. This one operation, 
of putting things into fit places for being acted upon by their own 
internal forces, and by those residing in other natural objects, is all 
that man does, or can do, with matter. He only moves one thing 
to or from another. He moves a seed into the ground; and the 
natural forces of vegetation produce in succession a root, a stem, 
leaves, flowers, and fruit. He moves an axe through a tree, and it 
falls by the natural force of gravitation; he moves a saw through it, 
in a particular manner, and the physical properties by which a softer 
substance give way before a harder, make it separate into planks, 
which he arranges in certain positions, with nails driven through 
them, or adhesive matter between them, and produces a table, or a 
house. He moves a spark to fuel, and it ignites, and by the force 
generated in combustion it cooks the food, melts or softens the iron, 
converts into beer or sugar the malt or cane-juice, which he has 
previously moved to the spot. He has no other means of acting on 
matter than by moving it. Motion, and resistance to motion, are 
the only things which his muscles are constructed for. By muscular 
contraction he can create a pressure on an outward object, which, if 
sufficiently powerful, will set it in motion, or if it be already moving, 
will check or modify or altogether arrest its motion, and he can do 
no more. But this is enough to have given all the command which 
mankind have acquired over natural forces immeasurably more 
powerful than themselves; a command which, great as it is already, 
is without doubt destined to become indefinitely greater. He exerts 
this power either by availing himself of natural forces in existence, 
or by arranging objects in those mixtures and combinations by which 
natural forces are generated; as when by putting a lighted match 
to fuel, and water into a boiler over it, he generates the expansive 



io8 



MATERIALS FOR ELEMENTARY ECONOMICS 



force of steam, a power which has been made so largely available 
for the attainment of human purposes. 

Labor, then, in the physical world, is always and solely employed 
in putting objects in motion; the properties of matter, the laws of 
nature, do the rest. The skill and ingenuity of human beings are 
chiefly exercised in discovering movements, practicable by their 
powers, and capable of bringing about the effects which they desire. 



26. THE INCREASE OF POPULATION IN THE UNITED STATES^ 

Under normal conditions, the rate of increase of a body of popula- 
tion slowly decreases. Other things being equal, as the density of 
population increases and as the difficulty of breadwinning becomes 
greater with diminished opportunity, natural increase and immigra- 
tion decrease. The rate of increase may be, and frequently has been, 
afifected by disturbing factors, causing it to increase temporarily or 
to decrease more rapidly than normal. As an illustration, the popu- 
lation, increases in numbers, and rates of increase in the United States 
by decades from 1790 to 1900 are given in the following table: 



Year 



Population 



Increase 



Rate of Increase 



1790. 
1800. 
1810, 
1820. 
1830. 
1840. 
1850. 
i860. 
1870. 
1880. 
1890. 
1900. 



3,929,000 

5,308,000 

7,240,000 

9,638,000 

12,866,000 

17,069,000 

23,192,000 

31,443,000 

38,558,000 

50,156,000 

62,622,000 

75,569,000 



1,379,000 

1,931,000 

2,399,000 

3,228,000 

4,203,000 

6,122,000 

8,251,000 

7,115,000 

11,597,000 

12,466,000 

12,946,000 



Percentage 

35 
36 
33 
33 
33 
36 
36 
23 
30 

25 

21 



From 1780 to 1840 the population was little disturbed and immi- 
gration was small, and the rate of increase dropped from 35 or 36 
per cent to 33 per cent. Between 1840 and 1850 there was a great 
wave of immigration, which increased in the succeeding decade and 
raised the rate of increase to 36 per cent. Then came the blighting 
effects of the Civil War; deaths from casualty and diseases and the 
reduction of births (aided to an uncertain extent by omission in the 

' Adapted from Henry Gannett's "Estimates of Future Population," in the 
Report of the National Conservation Commission (1909), II, 7-8. 



HUMAN BEINGS AS ECONOMIC FACTORS 109 

census of 1870) reduced the rate in that decade to 23 per cent. Be- 
tween 1870 and 1880 the country began to recover from the effects 
of the war, and the rate of population increased to 30 per cent. The 
succeeding decade witnessed a drop of 5 per cent, and the following 
one of 4 per cent. Thus in no years the rate of increase of popula- 
tion has been reduced from 35 to 21 per cent. If normal conditions 
prevail in the future, it is certain that the rate of increase will con- 
tinue to diminish until the rate reaches that of the densely popu- 
lated countries of western Europe — about 10 per cent increase per 
decade. It will be noted that in the table the numerical increase has 
been steady excepting for the period between i860 and 1870. 

A great variety of population conditions exists in the United States. 
There are communities where increase is supplied wholly by immi- 
gration; others receive no immigration, but are dependent upon the 
excess of births over deaths; there are regions where commerce and 
manufacturing cause dense population; thickly populated farming 
regions now passing into manufacturing communities; prosperous 
farming regions; sparsely peopled pastoral lands; and desert wastes 
with few people. All have different rates of increase, and the figures 
discussed represent the total of all the different conditions. 

27. THE MALTHUSIAN THEORY OF POPULATION 

The Malthusian theory of population was formulated in An Essay 
on the Principle of Population, written in 1798 by Thomas Robert 
Malthus (1766-1834), a young Englishman whose scientific interests 
had turned to the social questions of his time. The Essay was at first 
an anonymous argument intended to prove that the evils of excessive 
human increase constituted a fatal obstacle in the way of certain 
visionary schemes of social equality which had recently been proposed. 
In later editions, beginning with 1803, the argument was slightly 
modified and was supported by historical and contemporary evidence. 
The substance of the developed argument may be stated somewhat 
as follows. 

All living creatures seem to be characterized by a capacity for 
greater increase in numbers than the external conditions of life permit. 
In the case of man, if there were no limits upon reproduction except 
the physiological limits to procreation and child-bearing, multiplica- 
tion would continue at a rapid and approximately constant rate. 
Abstractly considered, population may be said to increase naturally in 



no MATERIALS FOR ELEMENTARY ECONOMICS 

a geometrical ratio, and to be capable of doubling itself as often as 
once in every twenty-five years. 

In comparison with this potential increase of population, the 
actual increase of the means of subsistence is slow. Land is limited. 
Methods of cultivation improve, but not so much as to double and 
redouble the products of the soil. "It may be fairly pronounced, 
therefore, that, considering the present average state of the earth, the 
means of subsistence, under circumstances the most favorable to 
human industry, could not possibly be made to increase faster than 
in an arithmetical ratio." 

The inherent tendency of population is thus to increase faster than 
the means of its support. But actual increase beyond the food supply 
is obviously impossible. That is, the abstract tendency of increase of 
population must be arrested by certain checks. "These checks to 
population, which are constantly operating with more or less force in 
every society, and keep down the number to the level of the means 
of subsistence, may be classed under two general heads — the preven- 
tive, and the positive checks." The preventive checks comprise 
various influences which diminish the possible number of births; and 
include, m particular, moral restraint, or the postponement of marriage, 
from motives of economic prudence, "with a conduct strictly moral 
during the period of this restraint." The positive checks "include 
every cause, whether arising from vice or misery, which in any degree 
contributes to shorten the natural duration of human life." They are 
the forces acting to reduce already redundant numbers, and range in 
form from outright starvation to the least of the various hardships in 
which destruction of life may be disguised. The checks are thus "all 
resolvable into moral restraint, vice, and misery," and since moral 
restraint may be regarded as a counsel of perfection, the pressure of 
population is a constant source of want and wretchedness. 

The somber and rather pessimistic tone of the Malthusian theory 
was in large measure due to the background of economic conditions 
prevailing at the time when Malthus wrote. The social shock of the 
industrial revolution in England and the burden of foreign war had 
aggravated the evils of an antiquated system of poor relief which 
seemed to many a cause rather than a corrective of destitution and 
degraded living. Not surprisingly, poverty arising from overpopula- 
tion seemed to Malthus an ever-threatening evil. If today the 
gloomy implications of Malthusianism are taken less seriously, the 
explanation is to be found chiefly in two facts: (i) the nineteenth 



HUMAN BEINGS AS ECONOMIC FACTORS 



III 



century, with its progress in manufacturing methods and in trans- 
portation, has brought an unexpected increase in our economic 
resources; and (2) new checks to population have become operative 
with surprising effect in response to subtle but powerful motives 
which may be traced back to the increasing exactions and oppor- 
tunities of life in modern society. 



28. ECONOMIC INFLUENCES ON THE MARRIAGE-RATE' 

The accompanying diagrams are drawn to show the relation 
between the marriage-rate, in England, and the extent of bank clear- 
ings and of unemployment, respectively. The curves have been 

Fig. I 

Comparative Fluctuations of the Marriage-Rate (Upper Curve) and 
Per Capita Bank Clearings (Lower Curve) in England, 1872-96 
1875 1880 1885 1890 1893 




' The diagrams are adapted from G. U. Yule, "Changes in the Marriage- and 
Birth-Rates in England and Wales During the Past Half Century," Journal of 
the Royal Statistical Society, LXIX, 95-96 (March, 1906). 

The data plotted in both diagrams are differences from periodic means — 
9-year means in Fig. I. and ii-year means in Fig. II. 



112 MATERIALS FOR ELEMENTARY ECONOMICS 

plotted in such a way as to eliminate the effect of long-run changes in 
the phenomena in question: they represent in every case simply the 
annual variations from the general trend which is indicated, arbi- 
trarily, by the horizontal line through each curve. 

In Fig. I the scales are such that the maximum fluctuations repre- 
sent a change of about i in the marriage-rate (which during this 

Fig. II 
Comparative Fluctuations of the Marriage -Rate (Upper Curve) and the 
Amount of Unemployment (Lower Curve) in England, 1864-96 
1865 1870 1875 1880 1885 1890 1895 




period averaged roughly 16 per thousand of population) and about 
£50 bank clearings per capita. In Fig. II unemployment is indicated 
by calculated values of an "index-number," which makes it imprac- 
ticable to state in simple terms the absolute amount of unemployment 
represented. 

29. THE QUALITY OF POPULATION 

(o) NON-SURVIVAL OF THE FITTEST^ 

My thesis is this: that the indisputable effect of the state of 
social progress and culture we have reached, of our high civilization 
in its present stage and actual form, is to counteract and suspend the 

'Adapted from W. R. Greg, Enigmas of Life, chap, iii. Triibner & Co., 
1872. The substance of the passage originally appeared in Fraser's Magazine 
(London), September, 1868. 



HUMAN BEINGS AS ECONOMIC FACTORS 113 

operation of that righteous and salutary law of "natural selection" 
in virtue of which the best specimens of the race — the strongest, the 
finest, the worthiest — are those which survive, multiply, become 
paramount, and take precedence; succeed and triumph in the struggle 
for existence, become the especial progenitors of future generations, 
continue the species, and propagate an ever improving and perfecting 
type of humanity. 

The principle of the "Survival of the Fittest" does not appear to 
fail in the case of races of men. Here the abler, the stronger, the 
more advanced, the finer, in short, are still the favored ones, succeed 
in the competition. The principle of "natural selection" therefore 
— of the superior and fitter races of mankind trampling out and 
replacing the poorer races, in virtue of their superior fitness — would 
seem to hold good universally. 

So probably it does also, and always has done, in the case of 
nations; and the apparent exceptions to the rule may be due only 
to our erroneous estimate of the true elements of superiority. 

But when we come to the case of individuals in a people, or classes 
in a community — the phase of the question which has far the most 
practical and immediate interest for ourselves — the principle would 
appear to fail, and the law is no longer supreme. Civilization, with 
its social, moral, and material complications, has introduced a dis- 
turbing and conflicting element. It is not now, as Mr. Wallace 
depicts, that intellectual has been substituted for physical superiority, 
but that artificial and conventional have taken the place of natural 
advantages as the ruling and deciding force. It is no longer the 
strongest, the healthiest, the most perfectly organized; it is not men 
of the finest physique, the largest brain, the most developed intel- 
ligence, the best morale, that are "favored" and successful "in the 
struggle for existence" — that survive, that rise to the surface, that 
"natural selection" makes the parents of future generations, the 
continuators of a picked and perfected race. It is still "the most 
favored," no doubt, in some sense, who bear away the palm, but the 
indispensable favor is too often that of fortune, not of nature. The 
various influences of our social system combine to traverse the 
righteous and salutary law which God ordained for the preservation 
of a worthy and improving humanity; and the "varieties" of man 
that endure and multiply their likenesses, and mold the features of 
the coming times, are not the soundest constitutions that can be 
found among us, nor the most subtle and resourceful minds, nor the 



114 MATERIALS FOR ELEMENTARY ECONOMICS 

most amiable or self-denying tempers, nor the most sagacious judg- 
ments, nor even the most imperious and persistent wills, but often 
the precise reverse — often those emasculated by luxury and those 
damaged by want, those rendered reckless by squalid poverty, and 
those whose physical and mental energies have been sapped, and 
whose characters have been grievously impaired, by long indulgence 
and forestalled desires. 

The two great instruments and achievements of civilization are 
respect for life and respect for property. In proportion as both are 
secure, as life is prolonged and as wealth is accumulated, and as the 
poor and weak are cared for, so nations rise — or consider that they 
have risen. Among wild animals the sick and maimed are slain; 
among savages they succumb and die or are suppressed; among us 
they are cared for, kept alive, enabled to marry and multiply. In 
uncivilized tribes, the ineffective and incapable, the weak in body 
or in mind, are unable to provide themselves food; they fall behind 
in the chase or in the march; they fall out, therefore, in the race of 
life. With us, sustenance and shelter are provided for them, and they 
survive. We pride ourselves — and justly — on the increased length 
of life which has been effected by our science and our humanity. 
But we forget that this higher average of life may be compatible 
with, and may in a measure result from, a lower average of health. 
We have kept alive those who, in a more natural and less advanced 
state, would have died — and who, looking at the physical perfection 
of the race alone, had better have been left to die. Among savages, 
the vigorous and sound alone survive; among us, the diseased and 
enfeebled survive as well; but is either the physique or the intel- 
ligence of cultivated man the gainer by the change ? In a wild state, 
by the law of natural selection, only or chiefly, the sounder and 
stronger specimens were allowed to continue their species; with us, 
thousands with tainted constitutions, frames weakened by malady 
or waste, brains bearing subtle and hereditary mischief in their 
recesses, are suffered to transmit their terrible inheritance of evil to 
other generations, and to spread it through a whole community. 

Security of property, security for its transmission as well as for 
its enjoyment, is one of our chief boasts. Thousands upon thousands 
who never could themselves have acquired property by industry, or 
conquered it by courage, or kept it by strength or ingenuity, and who 
are utterly incompetent to use it well, are yet enabled by law to 
inherit and retain it. They are born to wealth, they revel in wealth, 



HUMAN BEINGS AS ECONOMIC FACTORS 115 

though destitute of all the qualities by which wealth is won, or its 
possession made a blessing to the community. In a natural state 
of society they would have been pushed out of existence, stripped 
of their inherited and ill-used possessions, jostled aside in the struggle 
and the race, and left by the wayside to die. In civilized communities 
they are protected, fostered, flattered, married, and empowered to 
hand down their vapid incapacities to numerous offspring, whom 
perhaps they can leave wealthy too. In old and highly advanced 
nations, the classes who wield power and affluence and social suprem- 
acy as a consequence of the security of property, do not as a rule 
consist — nay, may consist in a very small measure — of individuals 
who have won, or could have won, those influences for themselves 
— of natural "kings of men"; the ehte lots in life do not fall to the 
elite of the race or the community. Those possessions and that 
position, which in more simply organized tribes would be an indica- 
tion and a proof either of strength, of intelligence, or of some happy 
adaptation to surrounding exigencies, now in our complicated world 
indicate nothing — at least in five cases out of six — but merit or energy 
or luck in some ancestor, perhaps inconceivably remote, who has 
bequeathed his rank and property to his successors, but without the 
quaUties which won them and warranted them. Yet this property 
and rank still enable their possibly unworthy and incapable inheritors 
to take precedence over others in many of the walks of life, to carry 
off the most desirable brides from less favored though far nobler rivals, 
and (what is our present point) to make those brides the mothers 
of a degenerating, instead of an ever improving race. 

But even this by no means presents the whole strength of the case. 
Not only does civilization, as it exists among us, enable rank and 
wealth, however diseased, enfeebled, or unintelligent, to become the 
continuators of the species in preference to larger brains, stronger 
frames, and sounder constitutions; but that very rank and wealth, 
thus inherited without effort and in absolute security, often tend to 
produce enervated and unintelligent oflfspring. To be born in the 
purple is not the right introduction to healthy energy; to be sur- 
rounded from the cradle with all temptations and facilities to self- 
indulgence is not the best safeguard against those indulgences which 
weaken the intellect and exhaust the frame. No doubt noblesse 
oblige and riches can buy the highest education — always excepting 
that education by surrounding circumstances which is really the only 
one that tells very effectually on the youthful plant. No doubt, too, 



Il6 MATERIALS FOR ELEMENTARY ECONOMICS 

there are splendid and numerous exceptions — instances in which rank 
is used to mold its heir to its duties, and in which wealth is used to 
purchase and achieve all that makes life noble and beneficent. But 
we have only to look around us, and a little below the surface, and then 
ask ourselves whether, as a rule, the owners of rank and wealth — 
still more the owners of wealth without rank — are those from whose 
paternity we should have most right to anticipate a healthy, a noble, 
an energetic, or a truly intellectual offspring — a race fitted to control 
and guide themselves as well as others, to subdue the earth as well 
as to replenish it, to govern, to civilize, to illustrate, to carry for- 
ward, the future destinies of man ? 

And if it is not from the highest and most opulent that we can 
expect this desiderated posterity, assuredly it is not from the lowest 
and most indigent. The physique and the morale of both the extreme 
classes are imperfect and impaired. The physique of the rich is 
injured by indulgence and excess — that of the poor by privation and 
want. The morale of the former has never been duly called forth 
by the necessity for exertion and self-denial; that of the latter has 
never been adequately cultivated by training and instruction. The 
intellects of both have been exposed to opposite disadvantages. The 
organizations of neither class are the best in the community; the 
constitutions of neither are the soundest or most untainted. Yet 
these two classes are precisely those which are, or are likely to be, 
preponderatingly, the fathers of the coming generation. Both 
marry as early as they please and have as many children as they 
please — the rich because it is in their power, the poor because they 
have no motive for abstinence: and scanty food and hard circum- 
stances do not oppose but rather encourage procreation. Malthus' 
"prudential check" rarely operates upon the lowest classes; the 
poorer they are, usually, the faster do they multiply; certainly the 
more reckless they are in reference to multiplication. It is the middle 
classes, those who form the energetic, reliable, improving element of 
the population, those who wish to rise and do not choose to sink, 
those, in a word, who constitute the true strength and wealth and 
dignity of nations — it is these who abstain from marriage or post- 
pone it. Thus the imprudent, the desperate, those whose standard 
is low, those who have no hope, no ambition, no self-denial, on the 
one side, and the pampered favorites of fortune on the other, take 
precedence in the race of fatherhood, to the disadvantage or the 
exclusion of the prudent, the resolute, the striving, and the self- 



HUMAN BEINGS AS ECONOMIC FACTORS 117 

restrained. The very men whom a philosophic statesman, or a guide 
of some superior nature, would select as most qualified and deserving 
to continue the race are precisely those who do so in the scantiest 
measure. Those who have no need for exertion, and those who have 
no opportunities for culture, those whose frames are damaged by 
indulgence, and those whose frames are weakened by privation, breed 
ad libitum: while those whose minds and bodies have been hardened, 
strengthened, and purified by temperance and toil, are elbowed 
quietly aside in the unequal press. Surely the "selection" is no 
longer "natural." The careless, squalid, unaspiring Irishman, fed 
on potatoes, living in a pig-stye, doting on a superstition, multiplies 
like rabbits or ephemera; the frugal, fore-seeing, self-respecting, 
ambitious Scot, stern in his morality, spiritual in his faith, sagacious 
and disciplined in his intelligence, passes his best years in struggle 
and in celibacy, marries late, and leaves few behind him. Given a 
land originally peopled by a thousand Saxons and a thousand Celts, 
and in a dozen generations, five-sixths of the population would be 
Celts, but five-sixths of the property, the power, and the intellect 
would belong to the one-sixth of Saxons that remained. In the 
eternal "struggle for existence," it would be the inferior and less 
favored race that had prevailed — and prevailed by virtue not of its 
qualities but of its faults, by reason not of its stronger vitality but 
of its weaker reticence and its narrower brain. 

Of course it will be urged that the principle of natural selection 
fails thus utterly because our civiUzation is imperfect and misdirected ; 
because our laws are insufiicient; because our social arrangements 
are unwise; because our moral sense is languid or unenlightened. 
No doubt, if our legislators and rulers were quite sagacious and quite 
stern, our people in all ranks quite wise and good, the beneficent 
tendencies of nature would continue to operate uncounteracted. No 
constitutions would be impaired by insufficient nutriment and none 
by unhealthy excess. No classes would be so undeveloped either in 
mind or muscle as to be unfitted for procreating sound and vigorous 
offspring. The sick, the tainted, and the maimed would be too 
sensible and too unselfish to dream of marrying and handing down 
to their children the curse of diseased or feeble frames; or if they 
did not thus control themselves, the state would exercise a salutary 
but unrelenting paternal despotism, and supply the deficiency by 
vigilant and timely prohibition. A republic is conceivable in which 
paupers should be forbidden to propagate; in which all candidates 



Ii8 MATERIALS FOR ELEMENTARY ECONOMICS 

for the proud and solemn privilege of continuing an untainted and 
perfecting race should be subjected to a pass or a competitive exami- 
nation, and those only be suffered to transmit their names and 
families to future generations who had a pure, vigorous, and well- 
developed constitution to transmit; so that paternity should be the 
right and function exclusively of the elite of the nation, and humanity 
be thus enabled to march on securely and without drawback to its 
ultimate possibilities of progress. Every damaged or inferior tem- 
perament might be eliminated, and every special and superior one 
be selected and enthroned, till the human race, both in its manhood 
and its womanhood, became one glorious fellowship of saints, sages, 
and athletes; till we were all Blondins, all Shakespeares, Pericles', 
Socrates', Columbuses, and Fenelons. But no nation — in modern 
times at least — has ever yet approached or aimed at this ideal; no 
such wisdom or virtue has ever been found except in isolated indi- 
vidual instances; no government and no statesman has ever yet 
dared thus to supplement the inadequacy of personal patriotism by 
laws so sapiently despotic. The faces of the leading peoples of the 
existing world are not even set in this direction — at present notably 
the reverse. The more marked tendencies of the age are three; and 
all three run counter to the operation of the wholesome law of " natural 
selection." We are learning to insist more and more on the freedom 
of the individual will, the right of everyone to judge and act for 
himself. We are growing daily more foolishly and criminally lenient 
to every natural propensity, less and less inclined to resent, or control, 
or punish its indulgence. We absolutely refuse to let the poor, the 
incapable, the lazy, or the diseased die; we enable or allow them, if 
we do not actually encourage them, to propagate their incapacity, 
poverty, and constitutional disorders. And, lastly, democracy is 
every year advancing in power, and claiming the supreme right to 
govern and to guide; and democracy means the management and 
control of social arrangements by the least educated classes — by those 
least trained to foresee or measure consequences, least acquainted 
with the fearfully rigid laws of hereditary transmission, least habitu- 
ated to repress desires, or to forego immediate enjoyment for future 
and remote good. 

(b) EUGENICS 

The quaHty of the population has only within a few years begun 
to command from economists and other students of social problems 
the attention which so important a topic deserves. The influence 



HUMAN BEINGS AS ECONOMIC FACTORS 119 

of Malthus, at the beginning of the last century, committed the 
economic opinion of that period to the already prevalent view that 
questions of wise public policy in regard to population were essen- 
tially questions of mere numbers — the number of men who could be 
compelled to fight, labor, or pay taxes, and the numerical proportion 
between existing food-supply and the human beings to be fed. 
Almost no one then recognized the menace of the unequal increase 
of social and economic classes unequally endowed with the mental 
and physical characteristics which make for success. Indeed, the 
inequalities of innate human capacity were little appreciated until 
Darwin's Origin of Species, by pointing out the role of inherited 
variations throughout the animal world, suggested how far-reaching 
might be the effect of hereditary defects and abilities in determining 
the careers of individual men, and even the whole course of civiliza- 
tion. This suggestion presently led the late Sir Francis Galton to 
publish — tentatively, at first, in 1865, and later, in 1869, in his 
classic Hereditary Genius — an impressive array of evidence bearing 
on the inheritance of human talents and aptitudes, and an epoch- 
making argument in favor of selective improvement of the human 
breed as a promising means of increasing human welfare. Subse- 
quently Galton adduced new proofs of hereditary abihty; won new 
followers to his project of race-betterment, and raised the program 
of investigations which he had begun to the level of an incipient 
science, bearing the name, "Eugenics." 

"Eugenics," in the words of Galton, "is the study of agencies 
under social control that may improve or impair the racial qualities 
of future generations either physically or mentally." Primarily it 
is the study of human heredity and of social influences which act, 
through heredity, for racial degeneracy or racial improvement. 

The study of human heredity has made great advances within 
the past decade. The investigations of Professor Karl Pearson and 
his associates, conducted according to statistical methods which 
Galton had first outlined, led to the important conclusions that 
heredity is as strong in man as in other animals, and that our mental 
qualities are as much controlled by heredity as our more obvious 
physical traits. "All human quaHties," according to Professor 
Pearson, "are inherited in a marked and probably equal degree." 
As for the comparative effects of heredity and environment, he be- 
lieves it "quite safe to say that the influence of environment is not 
one-fifth that of heredity, and quite possibly not one-tenth of it." 



I20 MATERIALS FOR ELEMENTARY ECONOMICS 

This conviction of the superior potency of inheritance is borne out 
by the results of other researches, which not only have afforded 
substantial confirmation of many of Pearson's generalizations, but 
have also brought out specific evidence of the way in which heredity 
transmits such characteristics as feeble-mindedness, deaf-mutism, 
forms of insanity, color-blindness, and a long list of other defects. 
In many cases it is now possible to predict with no little accuracy 
the sorts of disabiUty which marriages of unsound stocks are likely to 
bring forth. Similarly, the reappearance of specific aptitudes in gifted 
families may be foretold, though, because of the comparatively com- 
plex and indefinite nature of such affirmative talents, the outcome is 
here less certain. 

Practical attempts to apply existing knowledge of heredity in 
the betterment of racial quality fall under two heads: positive, or 
constructive eugenics, and negative, or restrictive eugenics. On 
the one hand we may attempt to develop a better human type; on 
the other, we may content ourselves with ehminating the worst 
lapses from the normal t3^pe which now exists. Whichever program 
is adopted, applied eugenics must work mainly through the force 
which eugenic teaching can bring to bear on marriage selection. 
The course of either procedure is therefore likely to be obstructed 
by ignorance, inertia, prejudice, and the reluctance, desirable or 
undesirable, which is aroused by any attempt to transfer marriage 
and parenthood from the sway of the emotions to the domain of 
reason. But apart from this general difficulty, positive and negative 
eugenics have their special and respective limitations. Positive 
eugenics is particularly uncertain. Even if the powers of heredity 
were completely understood and entirely amenable to our control, 
we should lack adequate understanding of the most desirable human 
type to create. We cannot assume that abilities which now bring 
exceptional advantages to exceptional individuals would offer equal 
advantages to all if possession of these abilities became universal. 
Negative eugenics, indirectly, is beset by the same uncertainty. More 
immediately, it involves restraint which, if practiced at all, would 
probably be practiced more vigorously by the more thoughtful mem- 
bers of the community, with the result of Still further aggravating 
the disproportion between the slow increase of the intellectual classes 
and the teeming multiplication of the ignorant and improvident. On 
the whole, however, negative eugenics seems thus far the more hope- 
ful. Within limits, and in cases where the action of heredity is 



HUMAN BEINGS AS ECONOMIC FACTORS I2l 

highly definite, such restriction of non-eugenic marriages, by social 
compulsion or from individual sense of duty, holds out the prospect 
of a real reduction of human sufifering. To this end, therefore, the 
advocates of eugenics, in growing numbers, are working. How far 
their efforts have a scientific justification is yet to be proven. At 
least they have enlisted in their support the altruism which offers a 
present self-sacrifice for the welfare of posterity, and the half-mystical 
veneration that an age of evolutionary ideals feels for life and the 
continuance of life, as the physical process through which mankind 
works upward. 

30. THE COST TO SOCIETY OF A FAMILY OF DEGENERATES' 

Passing from the actual record, I submit an estimate of the 
damage of the family, based on what is known of those whose lives 
have been learned. The total number of persons included in the 
foregoing statement reach 709; besides these, 125 additional names 
have been gathered since the text of this essay was prepared, whose 
general character is similar. If all the collateral lines which have 
not been traced could be added to the 709 here tabulated, the aggre- 
gate would reach at least 1,200 persons, living and dead. Now, out 
of 700 persons we have 180 who have either been to the poor-house 
or received outdoor relief to the extent of 800 years. Allowing that 
the best members of the family have emigrated, it would be a low 
estimate to say that 80 of the additional 500 are, or have been, 
dependents, adding 350 years to the relief, making an aggregate of 
280 persons under pauper training, receiving 1,150 years of public 
charity. Great as this is, it is not all. In a former portion of this 
report, it was stated the pauper records cover 255 years, of which 
only 64 could be consulted, the difficulties of getting the remaining 
191 years being, in most cases, insuperable. Allowing that these 
191 years would yield as many years of relief as the 64 which have 
actually been searched, we should have an aggregate of 2,300 years 
of out-door relief. Allowing 150 years of alms-house life at $100 a 
year, the sum expended equals $15,000, and for 2,150 years of out- 
door relief, at the moderate rate of $15 a year, $32,250, making an 
aggregate expenditure of $47,250 in 75 years for this single family, 
52 per cent of whose women are harlots in some degree. Making a 

' From R. L. Dugdale, The Jukes, pp. 67-70. New edition, G. P. Putnam's 
Sons, 1910. _ 



122 



MATERIALS FOR ELEMENTARY ECONOMICS 



like computation for the other items of the schedule, allowing for 
all contingencies a financial estimate may be summed up as follows: 



Cost 



Total number of persons 

Number of pauperized adults 

Cost of alms-house relief 

Cost of out-door relief 

Number of criminals and offenders 

Years of imprisonment 

Cost of maintenance, at $200 a year 

Number of arrests and trials 

Cost of arrests and trials, $100 each 

Number of habitual thieves, convicted and uncon- 
victed 

Number of years of depredation, at 12 years each . . 

Cost of depredation, $120 a year 

Number of lives sacrificed by murder 

Value, at $1,200 each 

Number of common prostitutes 

Average number of years of debauch 

Total number of years of debauch 

Cost of maintaining each per year 

Cost of maintenance 

Number of women specifically diseased 

Average number of men each woman contaminates 
with permanent disease 

Total number of men contaminated 

Number of wives contaminated by above men 

Total number of persons contaminated 

Cost of drugs and medical treatment during rest of 
life, at $200 each 

Average loss of wages caused by disease during rest 
of life, in years 

Total years of wages lost by 400 men 

Loss, at $500 a year 

Average number of years withdrawn from produc- 
tive industry by each courtesan 

Total number of years lost by 50 courtesans 

Value estimated at $125 a year 

Aggregate curtailment of life of 490 adults, equiva- 
lent to 50 mature individuals 

Cash cost, each life at $1,200 

Aggregate of children who died prematurely 

Average years of life of each child 

Cash cost, each child at $50 

Number of prosecutions in bastardy 

Average cost of each case, $100 

Cost of property destroyed, blackmail, brawls' 

Average capital employed in houses, stock, furniture, 
etc., for brothels 

Compound interest for 26 years at 6 per cent 

Charity distributed by church 

Charity obtained by begging 



Total. 



1,200 
280 



140 
140 



250 



60 
720 



SO 

IS 

7SO 

?oo . 00 



40 

10 
400 

40 
440 



3 
1,200 



10 

500 



50 



300 
2 



30 



|fi5,ooo.oo 
32,250.00 



20,000 . 00 



25,000.00 



86,400.00 
8,400 . 00 



225,000.00 



600,000.00 



62,500.00 
60,000 . 00 



15,000.00 



3,000.00 
20,000 . 00 

6,000.00 
18,000.00 
10,000.00 



11,308,000.00 



■One house with furniture worth $1,100 was burned by a mob. 



HUMAN BEINGS AS ECONOMIC FACTORS 



123 



Over a million and a quarter dollars of loss in 75 years, caused 
by a single family 1,200 strong, without reckoning the cash paid for 
whiskey, or taking into account the entailment of pauperism and 
crime of the survivors in succeeding generations, and the incurable 
disease, idiocy and insanity growing out of this debauchery, and 
reaching further than we can calculate. It is getting to be time to 
ask, do our courts, our laws, our alms-houses and our jails deal with 
the question presented ? 

31. THE CONSERVATION OF HUMAN ENERGY' 

I. THE LENGTHENING OF LIFE 

There is no doubt that it is possible to prolong life. Making 
every allowance for inadequacies of statistics, we have strong reason 
to believe that life is twice as long as three or four centuries ago, and 
modern records show that it is today increasing more rapidly than 
ever. The rate at which this lengthening proceeds per century is 
shown in the following table: 

Rate of Lengthening Life (in Years, Per Century) 



Country 


Periods 


Males 


Females 


England 


1838-54 to 1871-81, or 30 years 

1871-81 to 1891-1900, or 20 years 

1817-31 to 1898-1903, or 76 years 

1867-77 to 1891-1900, or 23 years 

1835-44 to 1895-1900, or 57 years 

1816-40 to 1891-1900, or 67 years 

1789 to 1855, or 66 years 


5 

14 
10 

25 

13 

_ ^ 

I 


9 
16 


England 


France 




Prussia 


29 
IS 

7 


Denmark 

Sweden 


United States: 
Massachusetts . . 


Massachusetts . . 


181;? to 180^-07, or 40 years 


4 


India 


1881 to 1901, or 20 years 












From this table we observe: 

First. That the rate of progress is extremely variable in different 
countries. It is, perhaps, no accident that the maximum rate obtains 
in Prussia, which is probably the most progressive country in the 
discovery and application of scientific medicine. If progress con- 
tinues for a century at merely the present rate, human life in Prussia 
will be twenty-five to twenty-nine years longer than at present. The 
average rate of improvement for all the countries, excepting India, is 
about fifteen years per century. 

' Adapted from Irving Fisher's report on "National Vitality, Its Wastes and 
Conservation," in the Report of the National Conservation Commission (1909), III, 
724-31, 655-69, 739-42, 748-51. 



124 MATERIALS FOR ELEMENTARY ECONOMICS 

Second. It is noticeable that in practically all cases the improve- 
ment is more among females than males. This is one expression of 
the progress which womankind is now making in all lands. 

Third. This table, as well as the estimate of Professor Finkeln- 
burg, shows that not only is the average duration of human life 
increasing, but that the rate of increase is also increasing. The esti- 
mate of Finkelnburg that the lengthening of life during the interval 
between the sixteenth century and the end of the eighteenth century 
was from eighteen or twenty years to a little over thirty years, shows 
a rate of increase of about four years per century. During the fol- 
lowing century he estimated that the life span increased from a little 
over thirty to thirty-eight or forty years, or about nine years per 
century. In the table we see that in England the length of life was 
increasing in the middle of the nineteenth century at a rate of from 
five to nine years per century, while during the last quarter it was 
increasing at from fourteen to sixteen years per century. In Massa- 
chusetts the imperfect data indicate that life lengthened in the first 
half of the eighteenth century at the rate of about seven years a 
century. The indication for the last part of the nineteenth century 
is that it increased at the rate of fourteen years per century. 

We may briefly summarize chronologically the general rate of 
increase as follows: 

Lengthening of Human Life Per Century 

During seventeenth and eighteenth centuries 4 

During first three quarters of the nineteenth century 9 

Present rate in Massachusetts 14 

Present rate in Europe 17 

Present rate in Prussia 27 

It would be surprising if the future should not witness a further 
lengthening of human life, and at an increasing rate. Of course 
there is a limit to the further increase of human life, but there is good 
reason to believe that the limit is still far off. 

It has been estimated that it is possible to prolong life fifteen 
years.^ This is equivalent to reducing the death-rate by about one- 
fourth. This estimate is but a minimum. 

II. THE BROADENING OF LIFE 

Length of life is but one indication of vitality. Everyone recog- 
nizes that the Kfe of a valetudinarian or an invalid, however long, is 

' [The extensive statistical study upon which this estimate is based is omitted. 
— Editors.] 



HUMAN BEINGS AS ECONOMIC FACTORS 125 

but a narrow stream. We may therefore conceive, besides the dimen- 
sion of length, another dimension of Hfe, which may be called its 
"breadth." By the breadth of life we mean its healthiness. An 
ideally healthy life, free throughout from ailment and disability, is 
rarely, if ever, found. But it is the aim of hygiene to approximate 
such an ideal. 

a) Prevalence of serious illness. — 

The amount of invalidity or illness in a community has been esti- 
mated by a number of different investigators, and in a number of 
different ways. While the results vary somewhat, on the whole they 
harmonize fairly well. 

The most careful consideration of the various illness statistics 
available was made by Farr. He finds that the rate of invalidity 
increases with age, and at the later ages increases with great rapidity. 
The material he has used has come chiefly from various friendly 
societies in Great Britain and Scotland, and especially from the East 
India Company. His final conclusion is probably nearly as valid 
today as then. It is that corresponding to each death in a community, 
there are a little more than two years of illness. 

Another way of expressing the same fact is that for each annual 
death, there are on the average two persons constantly sick during 
the year. Applying this estimate to the United States, in which 
about 1,500,000 persons die per annum, there are probably at all 
times about 3,000,000 persons seriously ill. This means an average 
of thirteen days per annum for each inhabitant ^ 

b) Prevalence of minor ailments. — 

The statistics of morbidity which we have given, refer to forms 
which are relatively acute; but there are many milder forms which 
do not incapacitate the patient from work or compel him to take to 
his bed. The extent of these milder ills is not generally appreciated. 
They are often carefully guarded secrets. The individual often 
knows only his own physical troubles, but is unaware of the fact that 
almost every person about him has such troubles also. Once you 
penetrate beneath conventional acquaintance there will almost invari- 
ably be found some functional impairment of heart, liver, kidneys, or 
bladder; or dyspepsia, gastritis, jaundice, gallstones, constipation, 
diarrhea; or insomnia, neurasthenia, nervousness, neuritis, neuralgia, 

' [One disease after another is here taken up ; and it is shown how a consider- 
able proportion of serious illness is preventable. — Editors.] 



126 MATERIALS FOR ELEMENTARY ECONOMICS 

sick headache; or tonsiHtis, bronchitis, hay fever, catarrh, grip, colds, 
sore throat; or rupture, hernia, phlebitis, skin eruption; or rheuma- 
tism, lumbago, gout, obesity; or decayed teeth, baldness, deafness, 
eye ailment, spinal curvature, lameness, broken bones, dislocations, 
sprains, bruises, cuts, burns, or other "troubles." 

That almost all minor ailments can be avoided is scarcely to be 
doubted. Doctor Gulick is "inclined to believe that something like 
nine-tenths of all the minor ailments that we have, and which con- 
stitute the chief source of decreasing our daily efficiency, could be 
removed by careful attention." 

c) Prevalence of undue fatigue. — 

When a person is free from all specific ailments, both serious and 
minor, he usually calls himself "well." There is, however, a vast 
difference between such a "well" man, and one in ideally robust 
health. The difference is one of endurance or susceptibility to fatigue. 
Many "well" men cannot run a block for a street car or climb more 
than one flight of stairs without feeling completely tired out, while 
another "well" man will run twenty-five miles or climb the Matter- 
horn from pure love of sport. The Swiss guides, throughout the 
summer season, day after day, spend their entire time in climbing. 
A Chinese coolie will run for hours at a stretch. That the world 
regards such performances as "marvelous feats of endurance" only 
shows how marvelously out of training the world, as a whole, really is. 
In mental work some persons are unable to apply themselves more 
than an hour at a time, while others, like Humboldt or Mommsen, can 
work almost continuously through fifteen hours of the day. 

As Mosso and others have proved, muscular fatigue is a chemical 
effect, due to the circulation of "fatigue poisons" in the blood. This 
has been strikingly shown by experiments by Weishardt and others 
on dogs; when blood is transfused from an exhausted dog to a " frisky " 
one, the latter immediately wilts and becomes fatigued like the 
former, although he has not exerted himself in the least. In order to 
reduce fatigue, therefore, we should keep down fatigue poisons. It is 
not unlikely that almost all poisons produce fatigue, whether the 
poisons come from infections, from drugs, from impure or excessive 
food, from bad air, or from exertion ' 

' [Here follows a discussion of the various causes of fatigue, such as the use of 
alcohol and tobacco, improper diet, overexertion, excessive hours of labor, etc. — 
Editors.] 



HUMAN BEINGS AS ECONOMIC FACTORS 127 

The economic waste from undue fatigue is probably much greater 
than the waste from serious illness. We have seen that the average 
serious illness per capita is usually about two weeks each year. This 
is about 4 per cent of the year. Expressed differently, about 4 per 
cent of the population is constantly sick. 

On the other hand, the number that suffer partial disability 
through undue fatigue, certainly constitute the great majority of the 
population. No observer can fail to conclude that this is true of the 
American working, business, and professional classes, and the latest 
word among the students of school hygiene is that it is true to a 
large extent even among children. If, therefore, we assume that only 
50 per cent of the population is suffering some impairment of its best 
powers through undue fatigue, we are on safe ground. The extent 
to which the power of this supposed 50 per cent of the population is 
impaired must certainly exceed 10 per cent. When we consider that 
young men, supposed to be perfectly well, have the enormous room 
for improvement indicated in this chapter, and when we consider the 
gratifying results of experiments with a shorter work day, it will be 
seen that the true impairment is probably several times 10 per cent. 
Yet, if only 50 per cent of the population are suffering an impairment 
equal to only 10 per cent of their working powers, the result is 
equivalent to 5 per cent of the population suffering total impairment, 
which is more than the 4 per cent impairment from serious illness. 

The relatively slight impairment of efficiency due to overfatigue 
leads to more serious impairment. Just as minor ailments prove to 
have an unsuspected importance when considered as gateways to 
serious illness, so the inefficiency from fatigue is vested with great 
significance as the first step toward minor ailments. Obviously, if 
overfatigue could be reduced to a minimum, ' this reduction would 
carry with it the prevention of the major part of minor ailments, 
which in turn would lead to a great reduction in more serious illness, 
and this finally would lead to a great reduction in mortality. A 
typical succession of events is first fatigue, then colds, then tubercu- 
losis, then death. Prevention, to be effective, must begin at the 
beginning. 

III. THE MONEY VALUES OF PREVENTABLE WASTES 

Estimates of the money value of preventable wastes depend on 
the valuation of human life, of which several appraisals have been 
attempted We take, in the absence of any good statistics. 



128 



MATERIALS FOR ELEMENTARY ECONOMICS 



$700 per annum as a guess, but a safe minimum for the average 
earnings of the workers of all grades, from day laborers to railroad 
presidents. This assumes that all of the working years are actually 
employed in work. But, since about one-fourth of the persons of 
working age are not workers, but are supported (for the most part) 
by earnings of capital, the average should be cut down to three- 
fourths of this figure, or $525. 

Using this as a basis, we may compute the minimum worth of the 
average American life at different ages, as follows: 



Age 


Net Worth of 

a Person, in 

Dollars 


Age 


Net Worth of 

a Person, in 

Dollars 




c 


90 

950 
2,000 
4,000 


30 

SO 

80 


4,100 
2,900 
— 700 


10. . . . 




20. . . . 





From the table from which these figures are taken it is possible to 
base minimum estimates for (i) the average economic value of the 
inhabitants of the United States by using the census figures for age 
distribution of population; this calculated average is $2,900; (2) the 
average economic value of the lives now sacrificed by preventable 
deaths, using the age distribution of deaths, and the percentages of 
preventability; this calculated average is $1,700. 

The first figure shows that what might be called the vital assets 
of the United States for the population of over 85,500,000, as estimated 
for 1907 by the census, amount in value to 85,5oo,oooX$2,9oo, or 
$250,000,000,000, which, though a minimum estimate, greatly exceeds 
the value of all other wealth; the second figure enables us to estimate 
the needless waste of our vital assets. 

If we take the estimate of Professor Willcox of the death-rate in 
the United States, as at least 18 per 1,000 for the 85,500,000 persons 
estimated by the census as the population of the United States in 
1907, we have 1,500,000 as the number of deaths in the United States 
per annum. Of these 1,500,000 deaths, 42 per cent, or 630,000, are 
annually preventable or postponable. Since each postponement 
would save on the average $1,700, the national annual unnecessary 
loss of capitalized net earnings is 630,oooX$i,7oo, or $1,070,000,000, 
or about $1,000,000,000. 

With our present population, there are always about 3,000,000 
persons in the United States on the sick list. For the most part, these 



HUMAN BEINGS AS ECONOMIC FACTORS 129 

persons are older than the average. Farr gives a table showing that 
morbidity increases with age in geometric progression. By means of 
his table we may calculate on the same basis as the previous calcula- 
tions — that of the 3,000,000 sick, very close to a third, or 1,000,000 
persons, are in the working period of life. Assuming that average 
earnings in the working period are $700, and that only three-fourths 
of the one million potential workers would be occupied, we find over 
$500,000,000 as the minimum loss of earnings. 

The cost of medical attendance, medicine, nursing, etc., is con- 
jectured by Dr. Biggs in New York, to average for the consumptive 
poor at least $1.50 per day of illness. The cost per day of other 
illnesses than tuberculosis is presumably greater, and also the cost per 
day for other classes is higher than for the poor. Applying this to 
the 3,000,000 years of illness annually experienced, we should have 
$1,500,000,000 in all as the minimum annual cost of this kind. 

The statistics of the Commissioner of Labor show that the average 
expenditure for illness and death amounts to $27 per annum. This is 
for workingmen's families only. But even this figure, if applied to 
the 17,000,000 families of the United States, would make the total 
bill for caring for illness and death $460,000,000. The true cost may 
well be more than twice this sum. Certainly this estimate is more 
than safe, and is only one-third of the sum obtained by using Dr. 
Biggs's estimate. 

The sum of the costs of illness, including loss of wages and cost of 
care, is thus $460,000,000-!- $500,000,000, or $960,000,000. 

The above estimate is a general one for all illness. It would be 
possible to offer figures for the particular losses from particular dis- 
eases. Thus, from tuberculosis, the gross loss of earnings by illness 
and of potential earnings cut off by death, together with the expenses 
of illness, etc., amount to over $1,000,000,000 per annum. 

Of the sum mentioned, the loss to the consumptives themselves 
amounts to over $660,000,000, leaving $440,000,000 as the loss to 
other members of the community. At least three-fourths of these 
costs are preventable. Dr. George M. Kober thinks it is conservative 
to say that the annual cost of typhoid in the United States is $350,- 
000,000, and Dr. L. O. Howard believes that malaria alone costs the 
country $100,000,000 annually, and the insect diseases generally 
$200,000,000. He points out that one great item of loss is the reduced 
value of real estate in malarial regions. By drainage and destruction 
of mosquitos, most of this waste could be saved. The cost of the 



I30 MATERIALS FOR ELEMENTARY ECONOMICS 

care of the insane and feeble-minded is estimated by Charles L. Dana 
at $85,000,000 annually. What fraction of these costs is preventable 
it is difl&cult to say. The economic loss due to alcohol has been 
variously estimated. Of the billion dollars or more found to repre- 
sent the cost of illness, by far the major part is certainly avoidable. 
This is the belief of the best observers, such as Dr. Gulick, Dr. Kellogg, 
Mrs. Richards, Dr. Anderson, and others. Unfortunately, there are 
no exact statistics of preventability. We feel safe, however, in con- 
cluding that at least half a billion could be saved from the present 
cost of illness. This, added to the loss by preventable deaths of 
potential earnings of a billion, gives at least a billion and a half of 
preventable waste. This does not include the losses from inefficient 
work due to drunkenness or other vicious habits; nor does it include 
the cost of "undue fatigue," which we have some reason to believe 
exceeds in its effect on efficiency the loss from illness. But it would 
not be possible to state this loss in any definite or convincing figures. 

The actual economic saving annually possible in this country by 
preventing needless deaths, needless illness (serious and minor), and 
needless fatigue, is certainly far greater than one and a half billions, 
and may be three or more times as great. 

Dr. George M. Gould estimated that sickness and death in the 
United States cost $3,000,000,000 annually, of which at least a third 
is regarded as preventable. 

IV. THINGS WHICH NEED TO BE DONE 

In order that American vitality may reach its maximum develop- 
ment, many things need to be done. Among them are the following: 

1. The national government, the states, and the municipalities 
should steadfastly devote their energies and resources to the protec- 
tion of the people from disease. Such protection is quite as properly 
a governmental function as is protection from foreign invasion, from 
criminals, or from fire. It is both bad policy and bad economy to 
leave this work mainly to the weak and spasmodic efforts of charity, 
or to the philanthropy of physicians. 

2. The national government should exercise at least three public- 
health functions: first, investigation; second, the dissemination of 
information; third, administration. 

It should remove the reproach that more pains are now taken to 
protect the health of farm cattle than of human beings. It should 
provide more and greater laboratories for research in preventive 



HUMAN BEINGS AS ECONOMIC FACTORS 131 

medicine and public hygiene. Provision should also be made for 
better and more universal vital statistics, without which it is impos- 
sible to know the exact conditions in an epidemic, or, in general, the 
sanitary or insanitary conditions in any part of the country. It 
should aim, as should state and municipal legislation, to procure 
adequate registration of births, statistics of which are at present 
lacking throughout the United States. 

The national government should prevent transportation of disease 
from state to state in the same way as it now provides for foreign 
quarantine and the protection of the nation from the importation of 
disease by foreign immigrants. It should provide for the protection 
of the passenger in interstate railway travel from infection by his 
fellow-passengers and from insanitary conditions in sleeping-cars, etc. 

It should enact suitable legislation providing against pollution of 
interstate streams. 

It should provide for the dissemination of information in regard 
to the prevention of tuberculosis and other diseases, the dangers of 
impure air, impure foods, impure milk, imperfect sanitation, ventila- 
tion, etc. Just as now the Department of Agriculture supphes 
specific information to the farmer in respect to raising crops or live 
stock, so should one of the departments, devoted principally to health 
and education, be able to provide every health officer, school teacher, 
employer, physician, and private family with specific information in 
regard to public, domestic, and personal hygiene. 

It should provide for making the national capital into a model 
sanitary city, free from insanitary tenements and workshops, air 
pollution, water pollution, food pollution, etc., with a rate of death 
and a rate of illness among infants and among the population generally 
so low and so free from epidemics of typhoid or other diseases as will 
arouse the attention of the entire country and the world. 

There should be a constant adaptation of the pure-food laws to 
changing conditions. Meat inspection, and other inspection, should 
be so arranged as to protect, not only foreigners, but our own citizens. 
The existing health agencies of the government should be concentrated 
in one department, better co-ordinated, and given more powers and 
appropriations. 

3. State boards of health and state legislation should provide for 
the regulation of labor of women, should make physiological condi- 
tions for women's work, and prevent their employment before and 
after childbirth; should regulate the age at which children shall be 



132 MATERIALS FOR ELEMENTARY ECONOMICS 

employed, make reasonable regulations in regard to hours of labor 
and against the dangers in hazardous trades, and especially against 
the particular dangers of dust and poisonous chemicals ; should make 
regulations for sanitation and provide inspection of factories, schools, 
asylums, prisons, and other public institutions. Where municipalities 
have not the powers to enact the legislation above mentioned with 
reference to local conditions, the necessary legislation or authority 
should be provided by the state. Or where, by reason of the small 
size of the town, no sufficient local action is possible, the state should 
exercise the necessary functions. It should, in such cases, advise and 
supervise local boards of health. It should have an engineering 
department and advise regarding the construction of sewers and water 
supplies. Pollution of such supplies, unless entirely local, should be 
prevented by the state, which should be equipped with laboratories 
for the analysis of water, milk, and other foods. Suitable legislation 
should be passed regulating the sale of drugs, especially preparations 
containing cocaine, opium, or alcohol. Legislation — not too far in 
advance of public sentiment needed to dhforce it — should be passed 
regulating the sale of alcoholic beverages. State registration of 
births, deaths, and cases of illness should be much more general and 
efficient than at present. 

4. Municipal boards of health need to have more powers and 
greater appropriations; less political interference and better trained 
health officers; more support in public opinion. Their ordinances in 
regard to expectoration, notification of infectious disease, etc., should 
be better enforced by the police departments. 

More legislation should be advocated, passed, and enforced to 
the end that streets may be kept clean, garbage properly removed, 
sewage properly disposed of, air pollution of all kinds prevented, 
whether by smoke, street dust, noxious gases, or any other source. 
Noises also should be lessened. 

Municipalities need also to take measures to prevent infection 
being carried by flies, mosquitoes, other insects and vermin, and by 
prostitution. They need to guard with greater care the water supply, 
and in many cases to filter it ; they should make standards for milk 
purity and enforce them; they should also regularly, inspect other 
foods exposed for sale ; provide for sanitary inspection of local slaugh- 
ter houses, dairies, shops, lodging and boarding-houses, and other 
establishments within the power of the particular municipality; they 
should make and enforce stricter building laws, especially as relating 



HUMAN BEINGS AS ECONOMIC FACTORS 133 

to tenements, to the end that dark-room tenements may be elimi- 
nated and all tenements be provided with certain minimum standard 
requirements as to light, air, and sanitary arrangements. 

5. School children should be medically inspected and school 
hygiene universally practiced. This involves better protection 
against school epidemics, better ventilation, light, and cleanliness of 
the schoolroom, the discovery and correction of adenoids, eye strain, 
and nervous strain generally, and the provision for playgrounds. 
Sound scientific hygiene should be taught in all schools, public, pri- 
vate, normal, and technical, as also in colleges and universities. 

6. The curricula of medical schools should be rearranged with a 
greater emphasis on prevention and on the training of health officers. 
Sanatoria and hospitals, dispensaries, district nursing, tuberculosis 
classes, and other semi-public institutions should be increased in 
number and improved in quality. The medical profession, keeping 
pace with these changes, should be the chief means of conveying 
their benefits to the public. Universities and research institutions 
need to take up the study of hygiene in all its branches. Now that 
the diseases of childhood are receiving attention, the next step should 
be to study the diseases of middle life. These are diseases, to a large ex- 
tent, of nutrition and circulation, and consequently these subjects should 
receive special attention. Intelligent action must rest on knowledge, 
and knowledge of preventing disease is as yet extremely imperfect. 

7. In industrial and commercial establishments employers may 
greatly aid the health movement, and in many cases make their phi- 
lanthropy self-supporting by providing social secretaries, lunch and 
rest rooms, physiological (generally shorter) hours of work, pro- 
vision for innocent amusements, seats for women, etc. 

Life insurance companies could properly and with much profit 
club together to instruct their risks in self-care and secure general 
legislation and enforcement of legislation in behalf of public health. 

8. The present striking change in personal habits of living should be 
carried out to its logical conclusion until the health ideals and the ideals 
of athletic training shall become universal. This change involves a 
quiet revolution in habits of living, a more intelligent utilization of one's 
environment, especially in regard to the condition of the air in our 
houses, the character of the clothes we wear, of the site and architec- 
ture of the dwelling with respect to sunlight, soil, ventilation, and sani- 
tation, the character of food, its cooking, the use of alcohol, tobacco, 
and drugs, and last, but not least, sex hygiene in all its bearings. 



134 MATERIALS FOR ELEMENTARY ECOiSTOMICS 

9. The fight against disease will aid in the fight against pauper- 
ism and crime. It is also true that any measures which tend to 
eliminate poverty, vice, and crime will tend to improve sanitary 
conditions. 

ID. Finally, eugenics, or hygiene for future generations, should be 
studied and gradually put in practice. This involves the prohibi- 
tion of flagrant cases of marriages of the unfit, such as syphilitics, 
the insane, feeble-minded, epileptics, paupers, or criminals, etc. The 
example of Indiana in this regard should be considered and followed 
by other states, as also in regard to the unsexing of rapists, criminals, 
idiots, and degenerates generally. A public opinion should be aroused 
which will not only encourage healthy and discountenance degenerate 
marriages, but will become so imbedded in the minds of the rising 
generation as will unconsciously, but powerfully, affect their marriage 
choices. 

32. CAUSES OF THE GROWTH OF CITIES^ 

The industries of the human race may be conveniently grouped 
thus: (i) extractive, including agriculture, mining; (2) distributive, 
including commerce, wholesale and retail trade, transportation, com- 
munication, and all the media of exchange; (3) manufacturing; 
(4) services and free incomes, including domestic servants, govern- 
ment officials, professional men and women, students, etc. 

The extractive industries generally require the dispersion of the 
persons engaged therein.^ In particular, agriculture, the principal 
extractive industry, cannot be prosecuted by persons residing in large 
groups. It is conceivable that transportation methods might be so 
perfected as to permit the cultivator of the soil to reside in a city, but 
it is very unlikely. On the contrary, the improvements heretofore 
made in transportation have only strengthened the dispersion of the 
agricultural population by permitting uninhabited parts of the earth's 
surface to be settled and brought into cultivation. This will probably 
be the development of the future as far as human eyes can see. 

The distributive industries, on the other hand, are distinctly 
centralizing in their effects upon the distribution of the population 

^ Adapted from Adna F. Weber, The Growth oj Cities in the Nineteenth Century, 
pp. 223-29. Columbia University Studies in History, Economics and Public Law, 
Vol. XI, 1899. 

= In mining districts, it is true, the population is, oftener than not, quite dense. 
Nevertheless, it is seldom concentrated in great cities, the Transvaal being an ex- 
ception to the general rule. 



HUMAN BEINGS AS ECONOMIC FACTORS 135 

engaged in them. As methods of distribution have been improved 
and the distributive area enlarged, the tendency toward concentration 
has increased. The consolidation of two railway lines transfers 
employees from the junction to the terminal city. Every improve- 
ment in the mechanism of exchange favors the commercial center. Of 
even greater importance is the fact that the production of wealth is 
increasing at leaps and bounds; every year there is vastly greater 
wealth to distribute, and the process of distribution will require a 
growing percentage of all the workers for its efficient action. Hence, 
the more the social organism grows, and the higher its evolution, so 
much greater will the commercial centers become. 

Manufacturing industries also tend toward the concentration of 
population, and up to recent years manufacturing centers were co- 
incident with the commercial centres, i.e., the great cities. Recently 
the equalization of transportation facilities and the excessive rents 
of great cities have caused the managers of a good many industries 
to abandon them as sites in favor of the suburb or small town. The 
reason that this movement does not make for complete decentraliza- 
tion is that production on a large scale is the goal toward which all 
industries are tending with enlarging and more regular markets, and 
more convenient means of communication ; and production on a large 
scale requires, as a rule, the large factory and the grouping of allied 
trades. Other obstacles to decentralization are the presence in the 
large city of a supply of cheap, unskilled labor; of the best knowledge 
of art and technique; and especially of numerous industries whose 
products are intended for local consumption. 

The remainder of the population will in the main follow where the 
preceding classes lead. Those engaged in the professions or the 
rendering of personal service must reside near the consumers of their 
. products, that is, where people are numerous and money is plenty. 

Thus it appears that the efficient industrial organization of a 
nation on modern lines requires the concentration of population 
in virtually all the industries except agriculture; and since this 
industry, for several decades, has been able to deliver its product 
by employing a continually smaller proportion of the total popula- 
tion, it follows that the proportion in the centers of population has 
been increasing. 

In the immediate future, we may expect to see a continuation of 
the centralizing movement. While many manufacturers are locating 
their factories in the small cities and towns, there are other industries 



136 MATERIALS FOR ELEMENTARY ECONOMICS 

that prosper most in the great cities. Commerce, moreover, em- 
phatically favors the great centers, rather than the small or inter- 
mediate centers. And since, with ever-increasing production flowing 
from improved methods, commerce and trade are constantly expand- 
ing and absorbing an increasing proportion of the population, while 
manufacturing in a country where it has reached the stage of self- 
sufficiency employs a constant or even declining proportion of the 
population, the prospect is that the larger cities, including of course 
their suburbs, will continue to absorb the superfluous population of 
the rural districts and villages. 



I I 



H-l 

H 
1— 1 


O 
H 


Z 


o 


P 


Cl 




00 


W 


M 


g 


o 


n 


p< 


H 


Ph 


O 


< 


H >^ 



I 1 1 1 1 1 1 1 1 1 1 1 1 1 1 














F^ 


1161 
0161 




^UJ-L.^^J-L^J-±^ 


::t^ 












+ T 




:: 


:: 


m 






._LL 




8061 
8061 






■■ 


■■ 




-sr 










i061 




'TTr"T"r"r '""- 


^^ 






IT 


^11 1 


1 1 


1 






MMM 


1 


1 








In 


4- 




»06l 
C06I 

roei 






^ 


^" 


_ 


- 


^^ 


r~ 




r]|- 




OOSI 

eesi 
ssai 

f6»l 
£681 






— fii 


I 


^ 


^= 






4h — 




E 






[rmt m 

g= 


::: 


ii 




: 








\r. 






ie«i 

0C9I 
«S8I 
SSSi 
iS9l 
9S8I 
9881 
ti«9i 




-,- ^ 


. -1 


— : 


;C 


E 










^ 






-/.... 


::: 


:: 














T^ 


C88I 

zsai 

1881 








~'- 






T 


"= 






M ' 


SZtl 








__ 






1 










ZZ8I 






















































— t 


:;; 






=^ 


:: 






WF 


►Z9I 








-" 


- 4 


■ 


^ 






t\ 


# 


IZ9I 












^ 


Z 






1 I t 


























. 






































-- 






h: 












»»8I 








-- 








— 




i± 






S9BI 




















^^- 




J»^ 










_- 






-- 


— 













2991 








-^ 








— 




— 








1991 






































































c 


























































1 1 














-H- 










1 














1 t 




T 


1 1 1 


""T i 














L 






IL 


1 1 


.-U- 












c 








TT 


1 1 1 




! 1 


















■i 1 1 


1 1 






















w 




1 1 


























1 1 1 














_ 




_ 


__ 













LVik 








- 


-f- 


-- 


— 


— 


-^ 


— ■y 






9»« 
SMI 
























s 




»>8I 




























C*« 




























Z.tVi 
























^^ IT' 




























TT 


OMI 
























;n 






























9C8I 
























.— 




^esi 




























9P«I 
























^ 




9e9i 
























/ 




ve» 


























^ 




ecei 






























CNI 




























*!" 


IC8I 






























ocw 






























et«i 






























8:91 






























/tsi 






























etst 






























SUI 






























»-t9| 






























cut 




























CC9I 




























IC8I 




























Oltl 


1300.000 

uoo,ooo 

1,100.000 
I.00O.0OO 


i s 1 i 


i 




1 
% 






1 


i 

c 


\ 




3- 

3 









138 MATERIALS FOR ELEMENTARY ECONOMICS 

34. SOURCES OF IMMIGRATION AND CHARACTER OF 
IMMIGRANTS' 



From 1820 to June 30, 1910, 27,918,992 immigrants were admitted 
to the United States. Of this number 92.3 per cent came from 
European countries, which countries are the source of about 93 . 7 
per cent of the present immigration movement. From 1820 to 
1883 more than 95 per cent of the total immigration from Europe 
originated in the United Kingdom, Germany, Scandinavia, the 
Netherlands, Belgium, France, and Switzerland. In what follows 
the movement from these countries will be referred to as the "old 
immigration." Following 1883 there was a rapid change in the 
ethnical character of European immigration, and in recent years 
more than 70 per cent of the movement has originated in southern 
and eastern Europe. The change geographically, however, has been 
somewhat greater than the change in the racial character of the 
immigration, this being due very largely to the number of Germans 
who have come from Austria-Hungary and Russia. The move- 
ment from southern and eastern Europe will be referred to as the "new 
immigration." In a single generation Austria-Hungary, Italy, and 
Russia have succeeded the United Kindgom and Germany as the chief 
sources of immigration. In fact, each of the three countries first 
named furnished more immigrants to the United States in 1907 than 
came in the same year from the United Kingdom, Germany, Scandi- 
navia, France, the Netherlands, Belgium, and Switzerland combined. 

The old immigration movement in recent years has rapidly declined, 
both numerically and relatively, and under present conditions there 
are no indications that it will materially increase. The new immi- 
gration movement is very large, and there are few, if any, indications 
of its natural abatement. The new immigration, coming in such 
large numbers, has provoked a widespread feeling of apprehension as 
to its effect on the economic and social welfare of the country 

The old immigration movement was essentially one of permanent 
settlers. The new immigration is very largely one of individuals a 
considerable proportion of whom apparently have no intention of 
permanently changing their residence, their only purpose in coming 
to America being to temporarily take advantage of the greater wages 
paid for industrial labor in this country. This, of course, is not true 
of all the new immigrants, but the practice is sufficiently common to 

' From Reports of the Immigration Commission (191 1), I, 23-24. 



HUMAN BEINGS AS ECONOMIC FACTORS 



139 



warrant referring to it as a characteristic of them as a class. From 
all data that are available it appears that at least 40 per cent of the 
new immigration movement returns to Europe and that about two- 
thirds of those who go remain there. This does not mean that all of 
these immigrants have acquired a competence and returned to live 
on it. Among the immigrants who return permanently are those who 
have failed, as well as those who have succeeded. Thousands of 
those returning have, under unusual conditions of climate, work, 
and food, contracted tuberculosis and other diseases; others are 
injured in our industries; still others are the widows and children of 

Immigration to the United States by Decades, 1820 to 1910' 





Total Number of 
Immigrants 


Per Cent from 


Year Ending 
June 30 


Northern 

and Western 

Europe 


Southern 

and Eastern 

Europe 


Other Specified 
Countries 


1820— 1830 


151,824 
599,125 
1,713,251 
2,598,214 
2,314,824 
2,812,191 
5,246,6x3 
3,687,564 
8,795,386 


87 


2 


10. 1 


1831-1840 

1841— 1850 


92 
95 
94 
88 

73 
72 
44 
21 


5 
9 
6 

5 
7 

8 
8 


I 

I 

7 
18 
52 
71 


I 

3 
8 

5 
I 

3 
8 
9 


6.S 
3-8 


1851-1860 


4-5 


1861-1870 

1871-1880 


10. 1 
19.2 


1881-1890 


9-7 


1891-1900 

1901— 1910 


2-5 

6.3 















aliens dying here. These, with the aged and temperamentally unfit, 
make up a large part of the aliens who return to their former homes 
to remain. 

The old immigration came to the United States during a period of 
general development and was an important factor in that develop- 
ment, while the new immigration has come during a period of great 
industrial expansion and has furnished a practically unlimited supply 
of labor to that expansion .-^7 

As a class the new immigrants are largely unskilled laborers coming 
from countries where their highest wage is small compared with the 
lowest wage in the United States. Nearly 75 per cent of them are 
males. About 83 per cent are between the ages of 14 and 45 years, 
and consequently are producers rather than dependents. They bring 
little money into the country and send or take a considerable part of 
their earnings out. More than 35 per cent are illiterate, as compared 

' Adapted from data in Reports of the Immigration Commission (1911), IV, 16. 



I40 MATERIALS FOR ELEMENTARY ECONOMICS 

with less than 3 per cent of the old immigrant class. Immigration 
prior to 1882 was practically unregulated, and consequently many 
were not self-supporting, so that the care of alien paupers in several 
states was a serious problem. The new immigration has for the most 
part been carefully regulated so far as health and likelihood of pauper- 
ism are concerned, and, although drawn from classes low in the 
economic scale, the new immigrants as a rule are the strongest, the 
most enterprising, and the best of their class. 

35. CAUSES OF EMIGRATION^ 

The present movement of population from Europe to the United 
States is, with few exceptions, almost entirely attributable to economic 
causes. Emigration due to political reasons and, to a less extent, 
religious oppression, undoubtedly exists, but even in countries where 
these incentives prevail the more important cause is very largely an 
economic one. This does not mean, however, that emigration from 
Europe is now an. economic necessity. At times in the past, notably 
during the famine years in Ireland, actual want forced a choice 
between emigration and literal starvation, but the present movement 
results in the main from a widespread desire for better economic con- 
ditions rather than from the necessity of escaping intolerable ones. 
In other words, the emigrant of today comes to the United States not 
merely to make a living, but to make a better living than is possible 
at home. 

The purely economic condition of the wage-worker is generally 
very much lower in Europe than in the United States. This is espe- 
cially true of the unskilled laborer class from which so great a propor- 
tion of the emigration to the United States is drawn. Skilled labor 
also is poorly paid when compared with returns for like service in the 
United States, but the opportunity for continual employment in this 
field is usually good and the wages sufficiently high to lessen the 
necessity of emigration. A large proportion of the emigration from 
southern and eastern Europe may be traced directly to the inability 
of the peasantry to gain an adequate livelihood in agricultural pur- 
suits either as laborers or proprietors. Agricultural labor is paid 
extremely low wages, and employment is quite likely to be seasonal 
rather than continuous. In cases where peasant proprietorship is 
possible, the land holdings are usually so small, the methods of culti- 

' Adapted from Reports of the Immigration Commission (19 11), IV, 53-62. 



HUMAN BEINGS AS ECONOMIC FACTORS 



141 



vation so primitive, and the taxes so high, that even in productive 
years the struggle for existence is a hard one, while a crop failure means 
practical disaster for the small farmer and farm laborer alike. In 
agrarian Russia, where the people have not learned to emigrate, a 
crop failure results in a famine, while in other sections of southern 
and eastern Europe it results in emigration, usually to the United 
States. Periods of industrial depression as well as crop failures stimu- 
late emigration, but the effect of the former is not so pronounced, for 
the reason that disturbed financial and industrial conditions in Europe 
are usually coincidental with like conditions in the United States, and 
at such times the emigration movement is always relatively smaller. 
The fragmentary nature of available data relative to wages in 
many European countries makes a satisfactory comparison with wages 
in the United States impossible. Unfortunately, too, these data are 
missing for countries which are now the chief sources of European 
emigration to the United States. It is possible, however, to show the 
relative wages and hours of labor at a comparatively recent date in 
some leading occupations in the United States, Great Britain, Ger- 
many, and France, and as the economic status of wage-workers is 
much higher in the three latter countries than in southern and eastern 
European countries the approximate difference between wages in 
such countries and in the United States may be inferred. 

Wages and Hours of Labor in Leading Occupations in the United States, 
Great Britain, Germany, and France, 1903 

(Compiled from Bulletin of the United States Bureau of Labor, No. 54, pp. 
1120-1125.) 



Occupation 



Wages per Hour in — 



United 
States 



Great 
Britain 



Ger- 
many 



France 



Houxs PER Week in- 



United 
States 



Great 
Britain 



Ger- 
many 



France 



Blacksmiths. , 
Boiler makers 
Bricklayers. . 
Carpenters. . 
Compositors . 
Hod carriers . 
Iron molders. 
Laborers. . . . 
Machinists. . 

Painters 

Plumbers. . . . 
Stonecutters. 
Stonemasons . 



0.17 


$0 


12 


• 17 




II 


.21 




13 


.20 
.18 
■13 




13 
08 


•17 
. 10 








08 


•17 
.18 




13 
12 


. 20 




II 


. 20 




12 


. 21 




13 



$0 



16 


.S6 


15 


56 


13 


47 


15 


49 


13 


49 


10 


47 


13 


.S6 


10 


.0 


13 


.0 


13 


48 


I.s 


48 


14 


48 


14 


49 



5367 

53 67 
5183 
50-17 
50.00 

51-83 
53-67 
52-50 
53-67 
51 .00 

49-17 
50.17 
50.17 



60.19 
60.00 
56.50 
55 30 
51.08 
59 50 



56.36 
60.00 
56-25 
56.68 
54.00 
56 . 50 



60. 19 
61.50 
63 .00 
60.00 
60.00 
63.91 
60.00 
60.00 
61.50 
60.00 
54.00 
60.00 
66.00 



142 MATERIALS FOR ELEMENTARY ECONOMICS 

In the above table the figures for the United States cover a wide 
area, representing the smaller as well as the larger centers of industry, 
while those for the European countries were taken in two or three of 
the larger centers of industry in each country. 

As before stated, there are available but little official data relative 
to wages in southern and southeastern Europe, but it is a well-known 
fact that they are very much lower there than in Great Britain, Ger- 
many, or France. The Commission found this to be true in the por- 
tions of Italy, Austria-Hungary, Greece, Turkey, Russia, and the 
Balkan States visited. In fact, it may safely be stated that in the 
latter countries the average wage of men engaged in common and 
agricultural labor is less than 50 cents per day, while in some sections 
it is even much lower. It is true that in sorrie countries agricultural 
laborers receive from employers certain concessions in the way of 
fuel, food, etc., but in cases of this nature which came to the attention 
of the Commission, the value of the concessions was insufficient to 
affect materially the low wage scale. 

It is a common but erroneous belief that peasants and artisans in 
the European countries from which the new immigrant comes can 
live so very cheaply that the low wages have practically as great a 
purchasing power as the higher wages in the United States. The low 
cost of living among the working people, especially of southern and 
eastern Europe, is due to a low standard of living rather than to the 
cheapness of food and other commodities. As a matter of fact, meat 
and other costly articles of food, which are considered as almost 
essential to the everyday table of the American workingman, cannot 
be afforded among laborers in like occupations in southern and east- 
ern Europe. 

Notwithstanding the bad economic conditions surrounding the 
classes which furnish so great a part of the emigration from southern 
and eastern Europe, the Commission believes that a laudable ambi- 
tion for better things than they possess rather than a need for actual 
necessities is the chief motive behind the movement to the United 
States. Knowledge of conditions in America, promulgated through 
letters from friends or by emigrants who have returned for a visit to 
their native villages, creates and fosters among the people a desire for 
improved conditions which, it is believed, . can be attained only 
through emigration. Unfortunately, but inevitably, the returned 
emigrant, in a spirit of braggadocio, is inclined to exaggerate his eco- 
nomic achievements in America. In consequence, some whose emi- 



HUMAN BEINGS AS ECONOMIC FACTORS 143 

gration is influenced by these highly colored statements, accompanied 
perhaps by a display of what to them seems great wealth, are doomed 
to disappointment. The latter, however, naturally hesitate to admit 
their failures, and consequently there is little to disturb the belief 
prevailing in southern and eastern Europe that success awaits all who 
are able to emigrate to the United States. 

It is entirely safe to assert that letters from persons who have 
emigrated to friends at home, have been the immediate cause of by 
far the greater part of the remarkable movement from southern and 
eastern Europe to the United States during the past twenty-five years. 
There is hardly a village or community in southern Italy and Sicily 
that has not contributed a portion of its population to swell the tide 
of emigration to the United States, and the same is true of large areas 
of Austria, Hungary, Greece, Turkey, and the Balkan States. There 
is a tendency on the part of emigrants from these countries to retain 
an interest in the homeland, and in consequence a great amount of 
correspondence passes back and forth. It was frequently stated to 
members of the Commission that letters from persons who have 
emigrated to America were passed from hand to hand until most of 
the emigrants' friends and neighbors were acquainted with tlie con- 
tents. In periods of industrial activity, as a rule, the letters so cir- 
culated contain optimistic references to wages and opportunities for 
employment in the United States, and when comparison in this regard 
is made with conditions at home it is inevitable that whole com- 
munities should be inoculated with a desire to emigrate. The reverse 
is true during seasons of industrial depression in the United States. 
At such times intending emigrants are quickly informed by their 
friends in the United States relative to conditions of employment, 
and a great falling off in the tide of emigration is the immediate result. 

Emigrants who have returned for a visit to their native land are 
also great promoters of emigration. This is particularly true of 
southern and eastern European emigrants, who as a class make more 
or less frequent visits to their old homes. Among the returning 
emigrants are always some who have failed to achieve success in 
America, and some who through changed conditions of life and 
employment return in broken health. It is but natural that these 
should have a slightly deterrent effect on emigration, but, on the 
whole, this is relatively unimportant, for the returning emigrant, as 
a rule, is one who has succeeded and, as before stated, is inclined to 
exaggerate rather than minimize his achievements in the United 



144 MATERIALS FOR ELEMENTARY ECONOMICS 

States. In times of industrial inactivity in the United States the large 
number of emigrants who return to their native lands of course serve 
as a temporary check to emigration, but it is certain that in the long 
run such returning emigrants actually promote rather than retard the 
movement to the United States. 

Next to the advice and assistance of friends and relatives who have 
already emigrated, the propaganda conducted by steamship ticket 
agents is undoubtedly the most important immediate cause of emi- 
gration from Europe to the United States. This propaganda flour- 
ishes in every emigrant-furnishing country of Europe, notwithstanding 
the fact that the promotion of emigration is forbidden by the laws of 
many such countries as well as by the United States immigration law. 

No data are available to show even approximately the total num- 
ber of such agents and subagents engaged in the steerage ticket 
business. One authority stated to the Commission that two of the 
leading steamship lines had five or six thousand ticket agents in Galicia 
alone, and that there was "a great hunt for emigrants" there. The 
total number of such agents is undoubtedly very large, for the steer- 
age business is vastly important to all the lines operating passenger 
ships, and all compete for a share of it. There is at present an agree- 
ment among the larger steamship companies which in a measure 
regulates the distribution of this traffic and prevents unrestricted 
competition between the lines, but this does not affect the vigorous 
and widespread hunt for steerage passengers which is carried on 
throughout the chief emigrant-furnishing countries. 

36. THE PROBLEMS OF IMMIGRATION' 

The chief subjects of a study of immigration may be briefly sum- 
marized as follows: 

1. The effect of immigration upon the physical characteristics of 
the American people as shown by: 

a) The health of the immigrant on his arrival in this country, 
and his effect upon the health of the community. 

b) The effect of the American environment upon the physical 
characteristics of the immigrant and his children. 

2, The effect of the immigrant upon the mental characteristics of 
the American people, as shown by: 

'Adapted from J. W. Jenks and W. J. Lauck, The Immigration Problem, 
pp. 6-9. Copyright by Funk & Wagnalls Co., 191 2. 



HUMAN BEINGS AS ECONOMIC FACTORS 145 

a) Illiteracy of the various races of immigrants. 

b) The relation of the immigrants to our public schools, and the 
effect of the schools upon the children of immigrants. 

c) The papers, books, and associations founded and supported by 
the immigrants. 

d) The occupations of the immigrants that may serve to indicate 
mental characteristics. 

3. The effect of immigration upon the morals of the American 
people, as shown by: 

a) The criminal immigrant. The moral characteristics of the 
various races may be indicated by the number of crimes and the char- 
acter of the crimes committed by them. 

b) The social evil and the white-slave traffic, indicated in part by 
court records and observations of social workers and special investi- 
gators. 

c) The immigrant pauper: A study of the immigrants in the 
charity hospitals and of the relief given by the charitable societies 
to immigrants.^ 

4. The effect of immigration upon American institutions, as 
shown by: 

a) Political effects, indicated by the relative number of immigrants 
of various races that become naturalized, and by the methods employed 
by political managers to influence the votes of the immigrants. 

b) The social effects as indicated by: 

(i) The church affiliations and religious practices and customs 
of the immigrants of different races. 

(2) The immigrant family, as shown in part by the marriage rela- 
tions; the fecundity of immigrant women, as compared with American 
women; and the children of the immigrants. The tendency also 
toward establishing families here, or leaving families in Europe, with 
the expectation of returning to them. 

(3) The immigrant colony. Both in our large cities and in agri- 
cultural districts, the effect of immigration upon our institutions has 
been profoundly modified by the frequent inclination of the immi- 
grants to form separate colonies which are maintained sometimes for 
generations. 

(4) Housing and living conditions. The congestion of immigrants 
in certain sections of our cities and industrial centers, the bunk-house 

' Pauperism is, of course, to be considered also in other than its moral aspects, 
but it is conveniently classified here. 



146 MATERIALS FOR ELEMENTARY ECONOMICS 

or lodging-house for men without families who do not become per- 
manent residents, the ownership of homes, and similar matters which 
affect living conditions, are of profound significance to society. 

5. The effect of immigration upon the economic and industrial 
conditions of the United States, as shown by: 

a) The occupations of the immigrant and of his children. Have 
racial characteristics or the European customs of the immigrants so 
determined the occupations which they enter here as to have produced 
any material modification of the relations between agriculture, manu- 
facturing, mining, trading, transportation, and other occupations ? 

b) Changes in industrial methods. Has the incoming of the 
immigrant affected the use of machinery or modified the form of our 
industrial organization? How has it affected the geographical dis- 
tribution of industries ? 

c) The employment of women and children as wage-earners. 

d) The displacement of American laborers or the immigrant wage- 
earners who arrived in this country twenty years ago by the recent 
immigrants from different countries. 

e) Labor organizations. Have the immigrants strengthened or 
weakened the labor organizations, and has the effect upon them been 
beneficial or injurious to the wage-earning classes ? 

/) The standard of living. At the base of every civilization stand 
the ideals of the people and their standards of living. The standard 
of living has so profound an influence upon the probability of the 
attainment of many ideals that it is to be considered possibly the 
most fundamental factor in determining the quality of the country's 
civilization. While one may well agree with James Russell Lowell, 
that "material success is good, but only as the necessary preliminary 
to better things," it is impossible to deny the fact that material 
success is often, if not always, a preliminary that is absolutely neces- 
sary to better things, so far as the question concerns development of 
mental characteristics, and perhaps also the modification of moral 
and social institutions. 

37. IMMIGRATION AND THE BIRTH-RATE^ 

About 1830, however, we reach a turning-point in the history of 
our population. In the decade 1830-40 the number of foreign 

' Adapted from Francis A. Walker, •'Immigration and Degradation," in 
Discussions in Economics and Statistics, Vol. II, pp. 421-26. Henry Holt & Co., 



HUMAN BEINGS AS ECONOMIC FACTORS 147 

arrivals greatly increased. Immigration had not, indeed, reached 
the enormous dimensions of these later days. Yet, during the decade 
in question, the foreigners coming to the United States were almost 
■ exactly fourfold those coming in the decade preceding, or 599,000. 
The question now of vital importance is this: Was the population of 
the country correspondingly increased? I answer, No! The popu- 
lation of 1840 was almost exactly what, by computation, it would 
have been had no increase in foreign arrivals taken place. Again, 
between 1840 and 1850, a still further access of foreigners occurred, 
this time of enormous dimensions, the arrivals of the decade amount- 
ing to not less than 1,713,000. Of this gigantic total, 1,048,000 were 
from the British Isles, the Irish famine of 1846-47 having driven 
hundreds of thousands of miserable peasants to seek food upon our 
shores. Again we ask: Did this excess constitute a net gain to the 
population of the country? Again the answer is, No! Population 
showed no increase over the proportions established before immigra- 
tion set in like a flood. In other words, as the foreigners began to 
come in larger numbers, the native population more and more with- 
held their own increase. 

Now, this correspondence might be accounted for in three differ- 
ent ways: (i) It might be said that it was a mere coincidence, no 
relation of cause and effect existing between the two phenomena. 
(2) It might be said that the foreigners came because the native popu- 
lation was relatively declining, that is, faiUng to keep up its pristine 
rate of increase. (3) It might be said that the growth of the native 
population was checked by the incoming of the foreign elements in 
such large numbers. 

The true explanation of the remarkable fact we are considering, 
I believe to be the last of the three suggested. The access of foreigners, 
at the time and under the circumstances, constituted a shock to the 
principle of population among the native element. That principle 
is always acutely sensitive, alike to sentimental and to economic 
conditions. And it is to be noted, in passing, that not only did the 
decline in the native element, as a whole, take place in singular corre- 
spondence with the excess of foreign arrivals, but it occurred chiefly 
in just those regions to which the newcomers most freely resorted. 

But what possible reason can be suggested \v^hy the incoming 
of the foreigner should have checked the disposition of the native 
toward the increase of population at the traditional rate ? I answer 
that the best of good reasons can be assigned. Throughout the 



148 MATERIALS FOR ELEMENTARY ECONOMICS 

northeastern and northern middle states, into which, during the 
period under consideration, the newcomers poured in such numbers, 
the standard of material living, of general intelligence, of social 
decency, had been singularly high. Life, even at its hardest, had' 
always had its luxuries; the babe had been a thing of beauty, to be 
delicately nurtured and proudly exhibited; the growing child had 
been decently dressed, at least for school and church; the house had 
been kept in order, at whatever cost, the gate hung, the shutters in 
place, while the front yard had been made to bloom with simple 
flowers; the village church, the public schoolhouse, had been the best 
which the community, with great exertions and sacrifices, could erect 
and maintain. Then came the foreigner, making his way into the 
little village, bringing — small blame to him ! — not only a vastly lower 
standard of living, but too often an actual present incapacity even to 
understand the refinements of life and thought in the community 
in which he sought a home. Our people had to look upon houses that 
were mere shells for human habitations, the gate unhung, the shutters 
flapping or falling, green pools in the yard, babes and young children 
rolling about half naked or worse, neglected, dirty, unkempt. Was 
there not in this a sentimental reason strong enough to give a shock 
to the principle of population ? But there was, besides, an economic 
reason for a check to the native increase. The American shrank from 
the industrial competition thus thrust upon him. He was unwilling 
himself to engage in the lowest kind of day-labor with these new ele- 
ments of the population; he was even more unwilling to bring sons 
and daughters into the world to enter into that competition. For 
the first time in our history, the people of the free states became 
divided into classes. Those classes were natives and foreigners. 
Politically, the distinction had only a certain force, which yielded more 
or less readily under partisan pressure; but socially and industrially 
that distinction has been a tremendous power, and its chief effects 
have been wrought upon population. 

If the foregoing views are true, or contain any considerable degree 
of truth, foreign immigration into this country has, from the time it 
first assumed large proportions, amounted, not to a re-enforcement 
of our population, but to a replacement of native by foreign stock. 
That if the foreigners had not come, the native element would long 
have filled the places the foreigners usurped, I entertain not a doubt. 
The competency of the American stock to do this would be absurd to 
question, in the face of such a record as that for 1790 to 1830. 



HUMAN BEINGS AS ECONOMIC FACTORS 



149 



Whatever were the causes which checked the growth of the native 
population, they were neither physiological nor cUmatic. They were 
mainly social and economic; and chief among them was the access of 
vast hordes of foreign immigrants, bringing with them a standard of 
living at which our own people revolted. 

38. FECUNDITY OF NATIVE AND IMMIGRANT WOMEN IN 
RHODE ISLAND, 1900' 

All data are for women under 45 years of age, married ten to twenty years 



Nationality (as Determined by 

Country of Birth of 

Both Parents) 



Percentage of Women Bearing 



No 
Children 



I or 2 
Children 



3 to 5 
Children 



More than 
5 Children 



Average 

Number of 

Children 

Born per 

Woman 



All classes 

Native white of native parentage. . 

White of foreign parentage 

First generation (born abroad) . 
Second generation (born in U.S.) 

Canadian, English 

First generation 

Second generation 

Canadian, French 

First generation 

Second generation 

English 

First generation 

Second generation 

German 

First generation 

Second generation 

Irish 

First generation 

Second generation 

Italian 

First generation 

Second generation 

Scotch 

First generation 

Second generation 

Swedish 

First generation 

Second generation 

Other foreign 

First generation 

Second generation 

Native negro 



II 3 

17 -S 

8.0 

7-2 

IO-5 

9.2 
9.1 

10.4 

S-2 
5-2 
s-2 

Q.8 
8.6 
14.6 

10.4 
9 5 
12.0 

8.8 

7.6 

10.3 

51 

SI 
(a) 

10. 1 
8.9 
15.6 

7.0 
7.1 
(a) 

7-3 

7.0 

16.7 



26.1 
41.2 

18.9 
17.2 
23 9 

26.8 
25-3 
37-3 



30.0 
27.8 
39-4 

26.8 
19.6 
39 o 

ISS 
130 
18.7 



35-7 
32.3 



10. S 
10.6 
(a) 

27 .6 
23 -3 
46.7 

21.8 
21 .9 

(a) 

20.7 
20.3 
30 o 

26.2 



43 S 
43-6 
(a) 



38.9 
41 .6 
26.7 

46.0 
46.0 
(<i) 

413 
41-7 
30.0 



26.9 
9.2 



3S-4 
37.8 
28.1 

251 
2S-3 
24.0 

54-2 
563 
42.8 



19.4 
24 9 



37-7 
42.1 
32.0 

40.8 
40.8 
(a) 

23 S 
26.2 



2S-I 

25.0 

(a) 

30.8 
31 I 
23.4 

26. s 



3.8 

2.5 



45 

4-7 



SO 
SO 
(a) 



3.6 
3 9 
2.4 

4.0 
3-9 

(a) 



(a) Not computed owing to small number involved. 



'Adapted from Reports of the Immigration Commission (1911), XXVIII, 
743-48. 



I50 MATERIALS FOR ELEMENTARY ECONOMICS 

39. IMMIGRATION AND THE USE OF MACHINERY' 

The remarkable development of machinery and division of labor 
in the United States has been coincident with the enormous immigra- 
tion of foreign laborers. There is a close relationship between the 
two movements. In the first place, from the earliest beginnings of 
modern industry both skilled and unskilled laborers in England and 
America have implicitly argued that these mechanical innovations, 
which before their very eyes both substituted unskilled for skilled 
labor and displaced both kinds of labor, were hostile to their interests. 
Where, as in England, it has been possible for labor to organize, or 
where, as in England and Germany, without effective organization, 
there have been long accepted traditions and customary lethargic 
methods of doing work, the introduction of machinery and division 
of labor have been seriously checked. But in America, with its 
mixed races, there has of late years been neither organization nor 
tradition, or, rather, obstacles imposed by tradition and organization 
have been easily broken down. The same is true in England itself 
in those few trades where the immigrant has entered, as in the 
clothing trade. It was the Russian Jew who, in that country, intro- 
duced the sewing machine and the minute subdivision of labor in the 
face of the English journeyman tailor, who despised these innovations 
as destructive to his trade skill. In America this process has been 
nearly universal in all trades, and the high degree of machine industry 
in this country, with its low cost of production and large growing 
exports, may almost be said to be a direct effect of immigration. 
The industrial menace to Europe from American manufactures is 
very largely the work of the European immigrant himself removed 
to America. Not that the immigrant has been prominent as an 
inventor and organizer of machine production, but that he has 
removed all obstacles to its free and rapid introduction, and so has 
stimulated invention and business organization. The minute sub- 
division of labor in the sewing trade, has indeed been devised in order 
to put the hordes of unskilled immigrants easily to work, and they 
have created for themselves practically a new industry, that of ready- 
made clothing for the country at large, alongside that of the journey- 
man tailor, who continues his traditional methods of work for the 
more expensive custom garments. In other trades, likewise, the 

' From John R. Commons, 'Immigration and Its Economic Effects," in 
the Report of the Industrial Commission (1901), XV, 313-14. 



HUMAN BEINGS AS ECONOMIC FACTORS 151 

objections of the old-time trade unions to the introduction of ma- 
chinery or to its rapid speeding have been nullified by competing 
establishments springing up and entering the race with him on the 
basis of machinery and immigrant labor. Ultimately he, too, has 
been compelled to accept the innovations or lose his job. The last 
few years have seen a number of unions, like the glass blowers and 
the iron and steel workers, formally remove through their national 
conventions several, if not all, their restrictions on machinery, 
business management, and speeding of work. 

In the second place, the fact that machinery and division of labor 
opens a place for unskilled immigrants, makes it possible not only to get 
the advantages of machinery, but also to get the advantages of cheap 
labor. If machinery were to be considered as strictly an economic 
force, then the labor employed to operate the machinery should 
receive the same wages as the skilled labor which it displaces. The 
economy would show itself in the greatly increased output. This has 
been the actual outcome in the case of the printers who, owing to 
their strong organization and their natural protection against immi- 
gration in the fact of the English language, receive even better wages 
on the typesetting machine than they formerly received in setting 
type by hand, and, at the same time, the cost of the work has been 
greatly reduced. But if, on the other hand, the new machinery is 
used to displace well-paid labor by ill-paid labor, it is a means of 
increasing permanently the proportion of low standard population 
in our midst. This result in past years has, in many cases, accom- 
panied immigration. It is shown in the cotton textile industry, 
where, with the chronic revolution in machinery, there has been found 
a place for continuous succession of lower and lower standards of 
living, following in order the native American, the Irish, the French 
Canadian, the Armenian, and the Syrian. The fate of the higher dis- 
placed classes and their ability to make the transition to other indus- 
tries depends upon the expansion of industry and the restriction on 
the growth of their numbers. While, therefore, immigration has 
furnished a field for the rapid expansion of machinery, it has permitted 
that machinery to be used as a refuge for the low-standard population. 
Whether this population in course of time is itself able to rise in the 
scale is a problem. Hitherto organization has been able to do but 
little for those industries where automatic machinery and division of 
labor have displaced skilled labor by unskilled labor. This is partly 
owing to another factor — the introduction of women and children. 



152 MATERIALS FOR ELEMENTARY ECONOMICS 

40. THE RECOMMENDATIONS OF THE IMMIGRATION 
COMMISSION' 

As a result of the investigation, the Commission is unanimously 
of the opinion that in framing legislation emphasis should be laid 
upon the following principles: 

1. While the American people, as in the past, welcome the 
oppressed of other lands, care should be taken that immigration be 
such both in quality and quantity as not to make too difficult the 
process of assimilation, 

2. Since the existing law and further special legislation recom- 
mended in this report deal with the physically and morally unfit, 
further general legislation concerning the admission of aliens should 
be based primarily upon economic or business considerations touching 
the prosperity and economic well-being of our people. 

3. The measure of the rational, healthy development of a country 
is not the extent of its investment of capital, its output of products, 
or its exports and imports, unless there is a corresponding economic 
opportunity afforded to the citizen dependent upon employment 
for his material, mental, and moral development. 

4. The development of business may be brought about by means 
which lower the standard of living of the wage-earners. A slow 
expansion of industry which would permit the adaptation and assimi- 
lation of the incoming labor supply is preferable to a very rapid 
industrial expansion which results in the immigration of laborers of 
low standards and efficiency, who imperil the American standard 
of wages and conditions of employment. 

The Commission agrees that: 

I. To protect the United States more effectively against the 
immigration of criminal and certain other debarred classes — 

a) Aliens convicted of serious crimes within a period of five years 
after admission should be deported in accordance with the provisions 
of House bill 20980, Sixty-first Congress, second session. 

b) Under the provisions of section 39 of the immigration act of 
February 20, 1907, the President should appoint commissioners to 
make arrangements with such countries as have adequate police 
records to supply emigrants with copies of such records, and that 
thereafter immigrants from such countries should be admitted to 
the United States only upon the production of proper certificates 
showing an absence of convictions for excludable crimes. 

' Reports of the Immigration Commission (1911), I, 45-48. 



HUMAN BEINGS AS ECONOMIC FACTORS 153 

c) So far as practicable the immigration laws should be so 
amended as to be made applicable to alien seamen. 

d) Any alien who becomes a public charge within three years 
after his arrival in this country should be subject to deportation in 
the discretion of the Secretary of Commerce and Labor. 

2. Sufficient appropriation should be regularly made to enforce 
vigorously the provisions of the laws previously recommended by 
the Commission and enacted by Congress regarding the importation 
of women for immoral purposes. 

3. As the new statute relative to steerage conditions took effect 
so recently as January i, 1909, and as the most modern steerage fully 
complies with all that is demanded under the law, the Commission's 
only recommendation in this connection is that a statute be imme- 
diately enacted providing for the placing of government officials, 
both men and women, on vessels carrying third-class or steerage 
passengers for the enforcement of the law and the protection of the 
immigrant. The system inaugurated by the Commission of sending 
investigators in the steerage in the guise of immigrants should be 
continued at intervals by the Bureau of Immigration. 

4. To strengthen the certainty of just and humane decisions of 
doubtful cases at ports of entry it is recommended — 

That section 25 of the immigration act of 1907 be amended to 
provide that boards of special inquiry should be appointed by the 
Secretary of Commerce and Labor, and that they should be com- 
posed of men whose ability and training qualify them for the per- 
formance of judicial functions; that the provisions compelling their 
hearings to be separate and apart from the public should be repealed, 
and that the office of an additional Assistant Secretary of Commerce 
and Labor to assist in reviewing such appeals be created. 

5. To protect the immigrant against exploitation; to discourage 
sending savings abroad; to encourage permanent residence and 
naturalization; and to secure better distribution of alien immigrants 
throughout the country — 

a) The states should enact laws strictly regulating immigrant 
banks. 

b) Proper state legislation should be enacted for the regulation 
of employment agencies. 

c) Since numerous aliens make it their business to keep immi- 
grants from influences that may tend toward their assimilation and 
naturalization as American citizens with the purpose of using their 



154 MATERIALS FOR ELEMENTARY ECONOMICS 

funds, of encouraging investment of their savings abroad, and their 
return to their home land, aliens who attempt to persuade immi- 
grants not to become American citizens should be made subject to 
deportation. 

d) Since the distribution of the thrifty immigrant to sections of 
the country where he may secure a permanent residence to the best 
advantage, and especially where he may invest his savings in farms 
or engage in agricultural pursuits, is most desirable, the division of 
information should be so conducted as to co-operate with states 
desiring immigrant settlers; and information concerning the oppor- 
tunities for settlement should be brought to the attention of immi- 
grants in industrial centers who have been here for some time and 
who might be thus induced to invest their savings in this country 
and become permanent agricultural settlers. The division might 
also secure and furnish to all laborers alike information showing 
opportunities for permanent employment in various sections of the 
country, together with the economic conditions in such places. 

6. One of the provisions of section 2 of the act of 1907 reads as 
follows: 

And provided further, That skilled labor may be imported if labor 
of like kind unemployed can not be found in this country. 

Instances occasionally arise, especially in the establishment of 
new industries in the United States, where labor of the kind desired, 
unemployed, cannot be found in this country and it becomes necessary 
to import such labor. Under the law the Secretary of Commerce 
and Labor has no authority to determine the questions of the neces- 
sity for importing such labor in advance of the importation, and it 
is recommended that an amendment to the law be adopted by adding 
to the clause cited above a provision to the effect that the question 
of the necessity of importing such skilled labor in any particular 
instance may be determined by the Secretary of Commerce and 
Labor upon the application of any person interested prior to any 
action in that direction by such person; such determination by the 
Secretary of Commerce and Labor to be reached after a full hearing 
and an investigation into the facts of the case. 

7. The general policy adopted by Congress in 1882 of excluding 
Chinese laborers should be continued. 

The question of Japanese and Korean immigration should be 
permitted to stand without further legislation so long as the present 
method of restriction proves to be effective. 



HUMAN BEINGS AS ECONOMIC FACTORS 155 

An understanding should be reached with the British Govern- 
ment whereby East Indian laborers should be effectively prevented 
from coming to the United States. 

8. The investigations of the Commission show an oversupply 
of unskilled labor in basic industries to an extent which indicates an 
oversupply of unskilled labor in the industries of the country as a 
whole, and therefore demand legislation which will at the present 
time restrict the further admission of such unskilled labor. 

It is desirable in making the restriction that — 

a) A sufficient number be debarred to produce a marked effect 
upon the present supply of unskilled labor. 

b) As far as possible, the aliens excluded should be those who 
come to this country with no intention to become American citizens 
or even to maintain a permanent residence here, but merely to save 
enough, by the adoption, if necessary, of low standards of living, to 
return permanently to their home country. Such persons are usually 
men unaccompanied by wives or children. 

c) As far as possible the aliens excluded should also be those who, 
by reason of their personal qualities or habits, would least readily be 
assimilated or would make the least desirable citizens. 

The following methods of restricting immigration have been 
suggested : 

a) The exclusion of those unable to read or write in some 
1 anguage. 

b) The limitation of the number of each race arriving each year 
to a certain percentage of the average of that race arriving during 
a given period of years. 

c) The exclusion of unskilled laborers unaccompanied by wives 
or families. 

d) The limitation of the number of immigrants arriving annually 
at any port. 

e) The material increase in the amount of money required to be 
in the possession of the immigrant at the port of arrival. 

/) The material increase of the head tax. 

g) The levy of the head tax so as to make a marked discrimi- 
nation in favor of men with families. 

All these methods would be effective in one way or another in 
securing restrictions in a greater or less degree. A majority of the 
Commission favor the reading and writing test as the most feasible 
single method of restricting undesirable immigration. 



156 MATERIALS FOR ELEMENTARY ECONOMICS 

The Commission as a whole recommends restriction as demanded 
by economic, moral, and social considerations, furnishes in its report 
reasons for such restriction, and points out methods by which Congress 
can attain the desired result if its judgment coincides with that of 
the Commission. 



V. CAPITAL GOODS AS ECONOMIC FACTORS 

41. THE ROUNDABOUT PROCESS' 

/^ A peasant requires drinking water. The spring is some distance 
from his house. There are various ways in which he may supply his 
daily wants. First, he may go to the spring each time he is thirsty 
and drink out of his hollowed hand. This is the most direct way; 
satisfaction follows immediately on exertion. But it is an incon- 
venient way, for our peasant has to take his way to the well as often 
as he is thirsty. And it is an insufficient way, for he can never 
collect and store any great quantity such as he requires for various 
other purposes. Second, he may take a log of wood, hollow it out into 
a kind of pail, and carry his day's supply from the spring to his 
cottage. The advantage is obvious, but it necessitates a roundabout 
way of considerable length. The man must spend, perhaps a day, 
in cutting out the pail; before doing so he must have felled a tree in the 
forest; to do this, again, he must have made an axe, and so on. But 
there is still a third way; instead of felling one tree he fells a number 
of trees, splits and hollows them, lays them end for end, and so con- 
structs a runnel or rhone which brings a full head of water to his 
cottage. Here, obviously, between expenditure of the labor and the 
obtaining of the water we have a very roundabout way, but then, the 
result is ever so much greater. Our peasant needs no longer take 
his weary way from house to well with the heavy pail on his shoulder, 
and yet he has a constant and full supply of the freshest water at his j, 
very door. 

Another example. I require stone for building a house. There is 
a rich vein of excellent sandstone in a neighboring hill. How is it to 
be got out ? First, I may work the loose stones back and forward with 
my bare fingers, and break off what can be broken off. This is the 
most direct, but also the least productive way. Second, I may take 
a piece of iron, make a hammer and chisel out of it, and use them on 
the hard stone — a roundabout way, which, of course, leads to a very 
much better result than the former. Third method — having a hammer 
and chisel I use them to drill a hole in the rock; next I turn my 

' From Eugen von Bohm-Bawerk, Positive Theory of Capital, translated by 
W. Smart, pp. 18-19. Macmillan & Co., 1891. 

157 



158 MATERIALS FOR ELEMENTARY ECONOMICS 

attention to procuring charcoal, sulphur, and nitre, and mixing them 
in a powder, then I pour the powder into the hole, and the explosion 
that follows splits the stone into convenient pieces — still more of a 
roundabout way, but one, which, as experience shows, is as much 
superior to the second way. in result as the second was to the first. 

Yet another example. I am short-sighted, and wish to have a 
pair of spectacles. For this I require ground and polished glasses, and 
a steel framework. But all that nature offers toward that end is 
silicious earth and iron ore. How am I to transform these into spec- 
tacles ? Work as I may, it is as impossible for me to make spectacles 
directly out of silicious earth as it would be to make the steel frames 
out of the iron ore. Here there is no immediate or direct method of 
production. There is nothing for it but to take the roundabout 
way, and, indeed, a very roundabout way. I must take the silicious 
earth and fuel, and build furnaces for smelting the glass from the 
silicious earth; the glass thus obtained has to be carefully purified, 
worked, and cooled by a series of processes; finally, the glass thus 
prepared — again by means of ingenious instruments carefully con- 
structed beforehand — is ground and polished into the lens fit for short- 
sighted eyes. Similarly, I must smelt the ore in the blast furnace, 
change the raw iron into steel, and make the frame therefrom — 
processes which cannot be carried through without a long series of 
tools and buildings that, on their part again, require great amounts 
of previous labor. Thus, by an exceedingly roundabout way the 
end is attained. 

The lesson to be drawn from all these examples alike is obvious. 
It is — that a greater result is obtained by producing goods in round- 
about ways than by producing them directly. Where a good can be 
produced in either way, we have the fact that, by the indirect way, a 
greater product can be got with equal labor or the same product 
with less labor. But, beyond this, the superiority of the indirect 
way manifests itself in being the only way in which certain goods can 
be obtained; if I might say so, it is so much the better that it is often 
the only way! 

42. MACHINERY USED IN THE MAKING OF PINS' 

Pins. — In the manufacture of pins, unit 486, as in most of the 
units of this industry, the first operation was that of straightening the 

' From the Thirteenth Annual Report of the Commissioner of Labor (1898), I, 
338-39- 



CAPITAL GOODS AS ECONOMIC FACTORS 159 

wire. This was done by means of a wire-straightening machine under 
both methods, but the time under the modern method was only 6 
minutes, while 4 hours, or forty times as long, were required under 
the primitive method. Under the machine method, in the second 
operation, the wire was cut and the pins headed and pointed by pin 
machines, 12 of which were tended by i person. The total time 
charged to this operation was 26 . 4 minutes. Under the hand method 
the pin was made in two parts, the head being made in the form of a 
coil and closed over the end of the shaft. It required seven operations 
to make the pin under this method, and the aggregate time required 
was 129 hours, or two hundred and ninety-three times as long as was 
required under the machine method to accomplish the same result. 
Whitening the pins was accomplished by means of a whitening tank 
operated by hand under both methods. Under the modern method 
this operation required i . 8 minutes as against 30 minutes required 
under the primitive method. The operation of drying and cleaning the 
pins was performed under the machine method by the use of a fanning 
mill in 3 minutes, while under the hand method, by means of a drying 
pan, I hour was required. The pins were polished in a tumbling barrel 
under both methods, requiring i . 2 minutes under the modern and 30 
minutes, or twenty-five times as long, under the primitive method. 
Pin-sticking machines were used under the modern method for stick- 
ing the pins into paper, the work being done in 30 minutes. Under 
the hand method this was accomplished in two operations, crimping 
the paper, which required 15 minutes, and sticking in the pins, which 
required 2 hours. Folding the papers, packing and labeling, and 
overseeing each required less time under the machine than under 
the hand method. Under the hand method the time charged to 
furnishing the power was i hour, while under the machine method 
the motive power was water, and there was no time charged to 
furnishing it; but 6 minutes were charged to keeping the machinery 
in order. 

The total time required for the production of 12 packages of i 
pound each of pins under the machine method was i hour and 33 . 9 
minutes as against 140 hours and 55 minutes required under the hand 
method — a ratio of about 90 to i in favor of the modern method. 
The handmade pins were made in England by the labor of 1 2 persons 
and finished in the United States by 5 persons, while 16 persons worked 
on the machine product. The machine-made pin is a much more 
desirable article than the handmade. 



i6o 



MATERIALS FOR ELEMENTARY ECONOMICS 









OJ 






O lo 




n 


VI 


CO w 


t^ VO r< t-^ 


0. 


c. 


1 










































00 


Tf 


^ M 0. 














a 


^ CO 




00 VO 






•* 


00 00 


"* VO «^ 






o 
U 

O 




C3 




o. 


to "d- 




00 


o 


VO to 


»o rh t^ to 


M 


H 




;^ 


fo t-^ 




M in 




" 




















00 ■* 




n 


H 


J^ o> 


VO N ■* 
















VO VO 




to 


to 


c< •* 
















VO VO 




to 


to 










3 




a 




Ov 


VO M 




to 


to 


VO 


w to ^ 














VO Oi 




VO 


a 


m 00 


PI •* •* 


VO 


to 










IT) CT 






o 


to 00 














^ IT. 


•t 
























^ 
























.as 

^3 


o ^ 


to 


VO lO 




to 


t^ 


H to 


w fJ VO 


00 







13 

u 










O) 





•* 


<N CO •* >0 


t^ 


t~ 


O 


to 


to 






ts 






•* 10 M ■* 


M 




























S 




3 


Tl- vO 


Tf 


n to 




o 


CO 


-* 0. 


N to Ov « 


0. 


0. 












VO t-^ 




00 


00 
















w 




N 


" 










'"' 
































w 






a SR 


o 




o 


o o 




o 


o 


TO VO 


to VO m 

















1^ a 






o 


o o 




o 


o 




to VO « 








d 




"d 




"* 




■* 


IN ■* 








't 


■* CO H 










H 























































W 






yD in 










00 


Tt H 


^ 00 V) 






































o 


■* « 


00 


N CT 




o 


"5 


irj 






H 








W 


H « 


M 


H 




"-< 




t^ \n 


\n yp, 10 \n • 


« 


to 


ill 
p 




1 o 
rt a 






00 o 






Ov 


N 


C) CO VO N 


V, 


CO 




^■3 


M Tj- 


to 


o> ■* 




00 




>o 0. 


•rj 00 VO 00 


S 


S 




3 










M 










N 




m 






















t_, Cfl Q 




diS 


N VO 




^ o 






00 


to a 


to V5 to 





t^ 




s^ 


IN ^ 




CO ■* 




o. 


o 




■* •* 't "O 




" 


w •< o 
cn S S 
F4 H n 




























-d 
























a 






in CI 




!>. 


VO 


Ov 't 


00 <o VO ^ 


l/J 


■* 




W 


00 t^ 


t^ 


-t o 




VO 




H H 


„ 






2 




i s 




lO 






lO 


\r, 




10 10 »o t-^ 


VO 


VO 






j3.a 






a ov 




o 


Oi 


Ov Ov 


Ov Ov Ov Ov 


Ov 






S-a 


00 00 
H M 


00 


00 00 




CO 


OO 






M 






•r) 






\n \n 




00 


00 


to to 


to CO 10 





VO 


















Ov 0. 










W 


00 00 


oo 


00 00 




00 


00 


00 00 

H M 


00 00 CO 00 










>i 




















T3 


T3 








•2 i2 


ffi 


S S2 




is 


t 


-H -S 


-0 -0 -73 13 


3 


3 


















a 




cS cii 












3 




ft ft 


ft 


ft ft 




ft 


ft 


>. >. 


;>.>.>.>. 












o o 


o 


o o 




o 


o 





0000 












O 




o o 


o 


o o 




o 


o 





0000 






o 
u 
w 

1 

o 
o 
u 
< 

1 

o 
§ 

i 

< 






W M 








'^ 




10 10 


10 10 lo 10 


"^ 


" 


§ 




.a 

ja 


en's cheap grade, kip, 
pegged boots, half- 
double soles 
en's fine grade, calf, 
welt, lace shoes, single 


soles, soft box toes 
en's medium grade, 
calf, welt, lace shoes, 
single soles, soft box 


toes 

en's grain, pegged, bro- 
gan shoes, tap soles 
omen's fine grade, kid, 
welt, button shoes. 


2, X 

H 
II 

9 S 


"fl-" 
en o - 


single soles, plain toes 
omen's cheap grade, 
?rain, McKay sewed, 
button shoes, half- 
double soles, plain toes 
-inch twilled cottonade, 
3 . 15 yards per pound, 
filling doubled _ and 
twisted, 60x40 picks 
-inch cotton drills, 3 . 08 
yards per pound, 72x44 
picks 

-inch gingham checks, 
4.07 yards per pound, 
48x40 picks 
-inch gingham plaids, 
4.5 yards per pound, 
52x44 picks 
-inch gingham stripes, 
4-35 yards per pound, 
44x52 picks 
-inch unbleached cot- 
ton sheeting, 3 yards 
per pound, 48x48 picks 


0. 3 5-cord ball sewing 
cotton, made from No. 
18 yarn 
0. 12 cotton yarn 


.ft 

p 






§ % 


§ 


% ^ 




^ 


^ 




0) N IN CO 


'Z, 


^ 




T3 

3 
HI 


en's cheap grade, kip, 
pegged boots, half- 
double soles 
en's fine grade, calf, 
welt, lace shoes, single 


soles, soft box toes 
en's medium grade, 
calf, welt, lace shoes, 
single soles, soft box 


toes 

en's grain, pegged, bro- 
gan shoes, tap soles 
omen's fine grade, kid, 
welt, button shoes. 


ii 
H 

II 
^% 

60~ 
in '" 


toes 

omen's cheap grade, 
kid, turned, lace shoes, 
single soles, plain toes 
omen's cheap grade, 
grain, pegged, button 
shoes, single soles, 


plain toes 

-inch twilled cottonade, 

2 . 18 yards per pound, 
filljng doubled, and 
twisted, 40x40 picks 
-inch cotton drills, 2.92 
yards per pound, 36x44 
picks 

-inch gingham checks, 

2.5 yards per pound, 

44x40 picks 

-inch gingham plaids, 

3.22 yards per pound, 

40x36 picks 

-inch gingham stripes, 

3 . 26 yards per pound, 
36x32 picks 

-inch unbleached cot- 
ton sheeting, 3 . 18 
yards per pound, 40x48 
picks 

cord sewing cotton, 
made from No. 6 yarn 


a 

t3 
>> 



HI 










S ^ 


^ 


S ^ 




^ 


is 


to to 


to CO CO CO 


i, 


IS 




















1 i 
§ 


B B a i 












6 
















cj cS nS a 


T3 
























j3 ja -a -J 


cd 








:z; 






























o o 




























o .a 




CO 


in t/3 




tn 


to 


a 


(3 3 J« 




H 




>H 


1 



CAPITAL GOODS AS ECONOMIC FACTORS i6l 

44. MACHINERY vs. HAND LABOR IN THE RAISING OF 
SMALL GRAINS' 

Small grains. — Units 3, barley; 13, oats; 17, rice; 18, rye, and 
26 and 27, wheat may be grouped under this head and be considered 
together as to a number of operations. In seeding, a sack was the 
tool or implement used in all these units under the earlier methods, 
the seed being sown broadcast and covered by the use of a brush, 
drag, or harrow. The time for sowing the seed was quite uniform, 
being, under the primitive method, i hour and 25 minutes in units 
3, 13, and 27; I hour and 22.5 minutes in unit 17; i hour and 15 
minutes in unit 26, and i hour in unit 18. Under the modern method 
a broadcast seeder was used in units 13 and 26, the sowing being done 
in 20 minutes and 1*5 minutes, respectively, or in about one-fourth 
and one-fifth of the time required by hand, as just shown. The sub- 
sequent harrowing to cover the seed occupied 50 minutes and 12 
minutes, respectively, in these units as against 2 hours and 50 minutes 
and 2 hours and 30 minutes under the earlier method. In unit 17 
the seed was sown and covered at one operation in 55 minutes as 
against a total of 3 hours and 12.5 minutes required for the work 
done in two operations under the more primitive method. The same 
conditions were found in unit 18 as in unit 17, the time being i hour 
under the modern and 2 hours and 40 minutes under the primitive 
method. The greatest advance in these units is to be seen in those 
numbered 3 and 27, where, under the machine method, a combined 
gang plow, seeder, and harrow broke the ground, sowed and covered 
the seed, and pulverized the topsoil at one operation. This was 
accomplished in unit 3 in 10.9 minutes, the power being a traction 
engine requiring the attention of two men, making the aggregate 
time 21.8 minutes. In unit 27 the same work was done in 15 minutes, 
the aggregate time for the engineer and fireman necessary to run the 
machine being 30 minutes. Strictly speaking, the time of the water- 
hauler should be added, as he was necessary for the operation of the 
machines used. Adding this time and comparing it with the total 
time required for the operations done separately by the primitive 
method, the time was 32.7 minutes under the modern as against 10 
hours and 55 minutes under the primitive method in unit 3, and 45 
minutes as against 10 hours and 55 minutes in unit 27, a reduction 
to about one-twentieth and one-fifteenth the time required under the 

'From the Thirteenth Annual Report of the Commissioner of Labor (1898), 
I, 84-87. 



l62 MATERIALS FOR- ELEMENTARY ECONOMICS 

hand method in the respective units. This great saving is accounted 
for by the fact that the implement used under the modern method 
was a 6-gang plow, each gang having 4 plows, each plow cutting 10 
inches — total 240 inches — with a seeder and harrow attached to each 
gang, and all operated by a traction engine. This would seem to 
mark the limit of progress in this direction, and such machinery is 
obviously of profitable use only in a level country where farming is 
conducted on a large scale. 

The operation of harvesting was uniformly accomplished by the 
use of a sickle under the earlier method, the cutting and binding being 
done by hand. Comparisons cannot be made in all of the units, as 
the operations vary so much under the modern method. Three units 
show the use of self-binders and three the use of 4:he combined reapers 
and thrashers which do away with the operations of binding and 
shocking the grain. In unit 13 the use of the self-binder reduced the 
time for cutting, binding, and shocking under the modern method to 
2 hours as against 16 hours and 40 minutes under the primitive, these 
operations under the primitive method requiring more than eight 
times as long as under the modern. In unit 17 the saving was still 
greater, the cutting and binding being done in 55 minutes under the 
modern as against 33 hours, or thirty-six times as long, under the 
primitive method by the use of sickles, no shocking being reported. 
The grain was shocked in unit 18, but the operation is kept separate, 
so that a comparison can be made as to the different operations. The 
cutting and binding required i hour with the self-binder, and 11 hours 
and 33.8 minutes with sickles, while the shocking required 2 hours 
under each method. The more complex machines, reported in units 
3, 26, and 27, were propelled by steam in units 3 and 27, and by 26 
horses in unit 26. Here the grain was reaped, thrashed, and sacked 
in one continuous operation. In unit 3 the operations necessary to 
do this work under the earlier method required 48 hours and 40 
minutes, while under the later method the time required by the 
machine was 7 . 5 minutes, 7 men being employed, making the total 
time 52.5 minutes; including the time of the two water- haulers, for 
the same reasons as noted in discussing the combined plow and seeder, 
the total time under the machine method was i hour and 7 . 5 minutes, 
or about one-forty-third the time required when sickles and flails 
were used. In unit 27 the totals are 49 hours and 20 minutes under 
the earlier method and i hour and 21 minutes under the later. The 
totals in unit 26 show the best proportionate results from the use of 



CAPITAL GOODS AS ECONOMIC FACTORS 163 

the combined reaper and thrasher, being 46 hours and 40 minutes 
under the earlier and i hour under the later method. The time for 
binding and shocking grain and stacking straw is included in the time 
for the hand methods given above (units 3, 26, and 27), which opera- 
tions were not necessary under the machine method. 

Thrashing is reported as a separate operation in units 13, 17, and 
18. In units 13 and 18 the work was done under the earlier method 
entirely by hand, the flail, pitchfork, shovel, and winnowing sheet 
being the tools used, while in unit 17a horse-power thrasher was used 
in 1870. This thrasher took 13 hours and 17.5 minutes to do the 
work done by the steam thrasher in 2 hours and 37.5 minutes. In 
unit 13, under the hand method, the thrashing required 41 hours and 
5 minutes as against i hour and 16.8 minutes, the time required by 
the use of the modern thrasher (including the time charged to hauling 
water) — a ratio of more than 32 to i in favor of the machine. In 
unit 18, the time required under the earlier and later methods, respec- 
tively, was 26 hours and 45 . i minutes and 7 hours. This dispro- 
portionately long time required (7 hours) is explained in part by the 
fact that the length of the rye straw made the work much slower than 
with other grains, and in part by the fact that the rye being thrashed 
from the barn mow, more men were necessary than if it had been 
thrashed from wagons. The actual running time of the thrasher in 
this case was 30 minutes. 

This group presents a comparison of extremes, the appliances 
being entirely changed throughout in some of the units, showing a 
more complete supplanting of hand by machine labor than can be 
found, perhaps, in any other line of agriculture. These changes have 
taken place in the past 65 years, as indicated by the dates given in 
these units, though in fact most of them have occurred in a much 
shorter period. In units 3 and 27 the number of operations is prac- 
tically reduced to two, and it is in these units that the greatest aggre- 
gate saving was effected, the total time in unit 3 being 63 hours and 
35 minutes under the earlier and 2 hours and 42.8 minutes under the 
later method — a ratio of more than 23 to i in favor of the modern 
method; while in unit 27 the respective totals are 64 hours and 15 
minutes and 2 hours and 58.2 minutes — a ratio of nearly 22 to i. 
These results are the best shown in this industry. 



1 64 MATERIALS FOR ELEMENTARY ECONOMICS 

45. MACHINE METHODS IN AGRICULTURE' 

The Thirteenth Annual Report of the Department of Labor gives 
the results of an extended investigation concerning production by 
hand and by machine methods, and affords the means for a reliable 
estimate of the influence of machine power. That portion devoted 
to agricultural operations shows in detail, for example, how many 
persons were ordinarily required for the production, by hand or by 
machine methods, of a given quantity of barley; what separate opera- 
tions were necessary in that production, as plowing, sowing, harrow- 
ing, etc.; what time was required for each operation, what tools or 
machines, if any, or other helps were used, and the money cost of 
each operation. 

From the summary given on pp. 24-25 of that report it appears 
that the man-labor power requisite for the production of thirty 
bushels of barley by the methods commonly in use in the season of 
1829-30, amounted to 63 hours and 35 minutes. The man-labor 
power required for accomplishing the same result, by the methods 
commonly in use in the season of 1895-96, is shown to have been only 
2 hours and 42 .8 minutes. From such data, the barley crop of 1896 
being known, we may readily determine not only what amount of 
man-labor was requisite for the production of that crop by the means 
commonly in use at that time, but also how much barley that same 
labor-power could have produced by the means commonly in use in 
the season of 1829-30. The difference between the quantity actually 
produced in the season of 1895-96, and the quantity which the labor- 
power required for the work of that season could have produced by 
the earlier hand methods, will represent the greater product due to 
the use of machinery. The crediting of the whole of this difference 
to the use of machinery is, doubtless, crediting it with too much. 
Credit is due, also, to better methods of cultivation, to pulverization 
of soils, to the use of fertilizers, to irrigation, rotation of crops, better 
seed, etc. These are not machine forces, although they are largely 
dependent upon the use of machinery as the use of machinery is, in 
some degree, dependent upon them. But to attempt the separation 
of these credits would be much like attempting to determine which 
blade of a pair of shears does the cutting. Moreover, these various 
other forces play, comparatively, a very incidental and subsidiary 

' Adapted from H. W. Quaintance, The Influence of Farm Machinery on Pro- 
duction and Labor, in Publications of the American Economic Association, Third 
Series, Vol. V (1904), No. 4, pp. 19-27. 



CAPITAL GOODS AS ECONOMIC FACTORS 



165 



part. I believe that the following pages will justify this opinion and 
venture, therefore, to disregard whatever inaccuracy there may be 
involved in the statement and to say that the entire increased product 
is due to the use of machinery.^ 

It will be sufficient, for purposes of illustration, to consider only 
a few of the principal crops in the production of which machinery has 
become a recognized factor. The crops selected for this purpose, 
together with the time of man-labor requisite for producing stated 
quantities of each crop by hand and by machine methods, as reported 
by the Department of Labor, are shown in the following table: 



Unit 
No.* 



Name and Quantity of Crop 

Produced and Description 

OF Work Done 



Barley: 30 bushels (i acre) 

barley 

Corn: 40 bushels (i acre) 

yellow corn, husked; 

stalks left in field 

Cotton: By hand, 750 

pounds; by machine 

1000 pounds (i acre) 

seed cotton 

Hay: Harvesting i ton 

(i acre) timothy hay. . 
Oats: 40 bushels (i acre) 

oats 

Potatoes: 220 bushels (i 

acre) potatoes 

Rice: 2640 pounds (i acre) 

rough rice 

Rye: 25 bushels (i acre) 

rye 

Wheat: 20 bushels (i acre) 

wheat 



Year of 
Production 



Hand Machine 



1829-30 
1855 

1841 
1850 
1830 
1866 
1870 
1847-48 
1829-30 



1895-96 



189s 
189s 
1893 
189s 
1895 
1894-95 
1895-96 



Time Worked 



Hand 



Hrs. Min 



63 
38 

167 
21 

66 
108 
62 
62 
61 



3S-0 
45-0 

48.0 
50 

150 

5S-0 
S-o 

58.9 
50 



Machine 



Hrs. Min. 



IS 

78 

3 

7 

38 

17 

25 

3 



42.8 



7.8 



42 

S6 

S 

s 

o 
19 



* The "unit numbers" here given are the unit numbers made use of in the Thirteenth Annual 
Report of the Department of Labor, from which the data in the table are taken. The numbers are 
repeated here only for purposes of reference. 

These several crops for the years covered by the data concerning 
production by the aid of machine power, were as follows: 

'For the purpose of this discussion I shall use the term machinery, generally, 
to signify not only machines, but also tools or implements, and other man-labor- 
saving forces when used as essential adjuncts or parts of machines. For example, 
horses, when used to draw a reaping machine, will be considered as much a part 
of the machine as an engine and boiler would be, if used for the same purpose. 



i66 



MATERIALS FOR ELEMENTARY ECONOMICS 



Name 

Barley 

Corn 

Cotton 

Hay 

Oats 

Potatoes 

Rice 

Rye 

Wheat 



Crop of 



Quantity Produced 



1896 


(bushels) 


1894 


(bushels) 


189s 


(500-pound bales) 


1895 


(tons) 


1893 


(bushels) 


189s 


(bushels) 


1896 


(pounds) 


189s 


(bushels) 


1896 


(bushels) 



69,695,223 
1,212,770,052 

7,161,094 

47,078,541 
638,854,850 
297,237,370 

168,685,440 
27,210,070 

427,684,346 



The number of days' work of man-labor requisite for producing the 
foregoing specified crops by the aid of machine power, together with 
the quantity of those several crops which the same labor-power could 
have produced by the earlier hand method, are shown in the following: 



Name 



Crop of 



Days' Work of 

Man-Labor 

Required 



The Same Labor-Power 



By Methods 
of 



Could Have Produced 



Barley . . 
Corn. . . 
Cotton . . 
Hay.... 
Oats . . . . 
Potatoes 
Rice . . . . 

Rye 

Wheat . . 



189s 
1895 
1893 
1895 
1895 
1895 



630,354 
45,873,027 
28,178,904 
18,556,791 
11,334,266 
5,134,100 

108,889 

2,739,147 
7,099,560 



1829-30 

1855 
1 841 
1850 
1830 
1866 
1870 
1847-48 
1829-30 



(bushels) 

(bushels) 

(bales) 

(tons) 

(bushels) 

(bushels) 

(pounds) 

(bushels) 

(bushels) 



2,972,839 

473,528,022 

2,518,972 

8,801,640 

68,433,307 
103,703,321 
46,303,587 
10,872,795 
23,245,490 



Finding next the difference between the quantities of the several 
crops actually produced under machine methods, in the years indi- 
cated, and the quantities which the labor-power requisite for their 
production with the aid of machines could have produced had it been 
devoted to the production of those same crops by hand methods, we 
have the following: 



Name 


Crop of 


Due to Use of Machinery 


Percentage of 
Actual Product 


Barley 


1896 
1894 
189s 
189s 
1893 
1895 
1895 
1895 
1896 


(bushels) 66,722,384 
(bushels) 739,242,030 
(bales) 4,642,122 
(tons) 38,276,901 
(bushels) 570,421,543 
(bushels) 193,534,049 
(pounds) 122,381,853 
(bushels) 16,337,275 
(bushels) 404,438,856 


= 95-7 


Corn 


= 60.9 


Cotton 


= 64.8 


Hay 


= 81.3 


Oats 


= 89.2 


Potatoes 


= 65.1 


Rice 


= 72-5 


Rye 


= 60.0 


Wheat 


= 945 







CAPITAL GOODS AS ECONOMIC FACTORS 167 

The increased effectiveness of man-labor power when aided by 
the use of machinery, as indicated by these figures, varies from 150 
per cent in the case of rye to 2244 per cent in the case of barley. 
From this point of view a machine is not a labor-saving but rather 
a product-making device. Taking the per cent of labor saved, as 
indicating the average proportion of these crops due to the use of 
machinery, it appears that the quantity of product is almost five 
times as great, per unit of labor, as it formerly was. 

Touching the difference in the cost of production per unit of 
product the Thirteenth Annual Report of the Department of Labor 
furnishes some data that will well repay a somewhat extended con- 
sideration. It should be observed, however, that these data with 
reference to the cost of production, although collected at the same 
time and, doubtless, with the same care, as the data already taken 
from that report, are, nevertheless, for the purposes of generalization, 
far less reliable. The average workman will perform the same quan- 
tity of work in a day, whether he works in one locality or in another; 
but rates of wages vary with localities and may vary both absolutely 
and relatively with differences in time. With this qualification in 
mind, it will be safe to take up the consideration of the data. 

Including the crops above considered, the report of the Depart- 
ment of Labor gives detailed information concerning the cost of 
production, by hand and by machine methods, of twenty-one differ- 
ent crops. The table ''Cost of Producing by Hand and by Machine 
Methods" gives the results of the several investigations in this 
particular, arranged in the order of the greatest saving in cost of 
production by machine as compared with hand methods.' 

' In the production of peas and in both tobacco crops there has been an 
increase in the cost. This increase is not, however, from the use of machinery in 
the production of these crops, but rather from the lack of it. In the case of tobacco 
(unit 22), for example, in which there has been the greatest increase in cost, the 
hand method production was with the aid of the following: wagon, spades, hoes, 
rakes, wooden moldboard plows, harrow, turn plow, wooden pegs for setting plants, 
plow for cultivating, and tobacco knives. The total extent of the machinery used 
in the production of this crop by machine methods was as follows: plow, harrow 
rakes, hoes, disk harrow, drag, wagon and barrels, transplanter, double-shovel 
plow, tobacco knives, wagon and racks, and screw racket prize. {Thirteenth 
Annual Report, Department of Labor, page 464.) — It must be evident at once 
from a comparison of these items that the difference in machinery cannot account 
for the difference in cost of production. The cause of the increased cost in the 
production of tobacco and peas (units 15, 22, and 23) was a higher rate of wages. 
In the case of peas, wages rose from 62 J cents to $1 .00 per day. In the case of 



i68 



MATERIALS FOR ELEMENTARY ECONOMICS 



The per cent column of the table on p. 169 shows that, for the 
most part, there has been a very great decrease in the cost of pro- 
ducing these various crops. The median is 39.92 per cent, but this 
number is clearly too low, for the crops in which machinery is most 
used are principally in the upper part of the table. 

The data requisite for a similar showing with respect to all farm 
crops and for any certain period are, I think, not to be had; but we 
can apply the data presented in the table on p. 169 to the principal 
crops of the year 1899, as reported by the Twelfth Census. The 
results are as follows: 



Cost of Producing Certain Crops of the Year il 
Machine Methods 



BY Hand and by 





Quantity Produced 


Cost of Production 


Name 


Hand Method 


Machine Method 


Barley 


(bushels) 119,634,877 
(pounds) 90,947,370 
(bushels) 2,666,440,279 
(bales) 9,534,707 
(tons) 84,011,299 
(bushels) 943,389,375 
(bushels) 11,791,121 
(bushels) 9,440,269 
(bushels) 273,328,207 
(pounds) 283,722,627 
(bushels) 25,568,625 
(tons) 6,441,578 
(bushels) 42,526,696 
(pounds) 868,163,275 
(bushels) 658,534,252 


$ 15,472,777 

4,107,576 

335,304,865 

58,638,448 

161,301,694 

90,801,227 

1,535,67s 
3,143,609 

16,373,935 
773,788 

5,369,411 
12,986,221 
41,676,162 

6,424,408 
126,109,309 


$ 4,227,098 

1,153,650 

220,647,933 

44,898,469 


Broom-corn 

Corn 


Cotton 


Hay 


52,927,118 
^7,7^5,575 


Oats 


Onions 


1,126,759 


Peas 


3,190,810 


Potatoes 

Rice 


7,417,133 
223,539 


Rye 


4,397,803 


Sugar cane 

Sweet potatoes . . . 
Tobacco 


5,272,431 

4,167,616 

18,491,859 


Wheat 


66,841,226 






Total 


$880,019,105 


$472,719,019 



tobacco (unit 22), wages rose from 30 cents per day to $20 and $23 per month; 
in unit 23, the rise of wages was from 75 cents to $1 .00 per day. It will be readily 
understood that when there is little or no change in the methods of production a 
rise in the rate of wages must cause a rise in the total cost of production. 

The "hand method" of production, as explained in the report of the depart- 
ment, "should not be construed to mean a method whereby a product is made 
entirely by the unaided hand and absolutely without the use of machines, but 
rather as the primitive method of production which was in vogue before the general 
use of automatic or power machines." — {Thirteenth Annual Report, Department 
of Labor, page 11.) — Similarly, it should be observed, in this connection, that 
"machine method" does not necessarily imply that machines are used, but only 
that the work was done by the most approved methods practiced in more recent 
years. 



CAPITAL GOODS AS ECONOMIC FACTORS 
Cost of Producing by Hand and by Machine Methods 



169 



Name and Quantity of Crop 
Produced 



Barley: 30 bushels (i acre) 
Wheat: 20 bushels (i acre) 
Broom-corn: i ton (3 acres) 
Rice: 2,640 pounds (i acre) 
Sweet potatoes: 105 bushels 

(i acre) 

Hay: Harvesting i ton (i 

acre) timothy hay 

Corn: 40 bushels (i acre) 

yellow corn, shelled; 

stalks, husks, and blades 

cut into fodder 

Sugar corn: 20 tons (i acre) 
Oats: 40 bushels (i acre) . . 
Strawberries: 4,000 quarts 

(i acre) 

Tomatoes: 150 bushels (i 

acre) 

Potatoes: 220 bushels (i 

acre) 

Wheat: 20 bushels (i acre) 
Hay: Harvesting and bal- 
ing I ton (i acre) timothy 

hay 

Apple trees: 10,000 (i acre) 

32 months, from grafts. . 
Beets: 300 bushels (i acre) 
Corn: 40 bushels (i acre) 

yellow corn, husked; 

stalks left in field 

Carrots: 30 tons (i acre) . . 
Onions: 250 bushels (i acre) 
Apple trees: 10,000 (i acre) 

32 months, from grafts. . 
Cottonf: By hand, 750 

pounds; by machine, 

1,000 pounds (i acre) . . . 
Rye: 25 bushels (i acre). . 
Turnips: 350 bushels (i 

acre) 

Carrots: 30 tons (i acre). . 

Peas: 20 bushels (i acre) 
field peas 

Tobacco: 1,500 pounds (i 
acre) Spanish seed leaf . . 

Tobaccof: By hand, 1,200 
pounds; by machine, 
1,250 pounds (i acre) . . . 



Year of Production 


Cost 


Hand 
Method 


Machine 
Method 


Hand 
Method 


Machine 
Method 


1829-30 

1829-30 

i860 

1870 


1895-96 

1895-96 

1895 

189s 


$ 3.88 
4.00 

90.33 
7.20 


$ 1.06 
1. 12 

25.37 
2.08 


1868 


1895 


34.30 


10.29 


1850 


189s 


1.92 


.63 


1855 
1855 
1830 


1894 
1895 
1893 


16.34 

40.32 

3-85 


6.62 

16.37 

1.60 


1871-72 


1894-95 


231.28 


97.92 


1870 


1895 


36.62 


15.88 


1866 
1829-30 


1895 
1895-96 


13.18 
3-83 


S.97 
2.03 


i860 


1894 


3 19 


I. 91 


1870-72 
1850 


1893-95 
1895 


200.00 
32.30 


121.00 
20.01 


1855 
1850 
1850 


1894 
1895 
1895 


5 03 
38.71 
32.56 


3.31 
37.21 
23.89 


1869-71 


1893-95 


202.00 


150.69 


1841 
1847-48 


1895 
1894-95 


6.15 
5.25 


4.71 
4-30 


1855 
1855 


1895 
1895 


25.63 
30.61 


23.36 
29.96 


1856 


1895 


6.66 


6.76 


1853 


1895 


25 85 


27.99 


1844 


1895 


•74 


2.67 



Percent- 
age of 
Decrease 



72.62 
71.98 
71.92 
71.09 

70.00 

66.95 



59. 49 
59 40 
58.47 

57.66 

56.64 

54.68 
47.11 

3992 

39.50 
38.05 



34.20 
29.72 
26.64 

25.41 



23.42 
18.10 



2.13 
Percentage 
of Increase 

1.56 

8.28 



261.42 



* See note to table on page 165. 

t The data have been modified to show a comparison on the basis of equal quantities pro- 
duced. If the equal areas be taken instead, the line should read: Cotton: By hand, etc., $9.23; 
$9.42; 2.09. 

X The data have been modified to show a comparison on the basis of equal quantities pro- 
duced. If the equal areas be taken instead, the line should read: Tobacco: By hand, etc., $8.88; 
$33.39; 276.33 



lyo 



MATERIALS FOR ELEMENTARY ECONOMICS 



The estimated cost of producing these crops by machine method 
is only 53 . 7 per cent of the estimated cost of producing the same crops 
by hand method. In other words, the saving in cost of production 
amounts to 46.3 per cent. The average date of the hand method 
investigations made use of in this presentation is 1850; the average 
date for the machine method investigations is 1895 — a difference of 
forty-five years. Surely it will not be too much to say that during 
the last half of the nineteenth century the cost of production of these 
crops was reduced by one-half. If we take into account the decreased 
cost to the farmer of food and lodging for his hired workmen and 
the decreased cost of storage room for grain in the straw, then the 
total saving must appear to be even greater than this. 

46. RELATIVE INCREASE OF CAPITAL AND EMPLOYEES 
IN MANUFACTURING 

All Manufactures in the United States 





1850 


i860 


1870 


1880 


1890 


1900 


1910 


Percentage 

Increase 

1910 over 

1850 


Average per establishment — 

Product 

Capital 


$8,280 

$4,330 

7-7 


$13,420 

$7,190 

9-3 


$13,420 

$6,720 

8.1 


$21,100 

$10,960 

10.6 


$28,070 

$19,020 

13.8 


$25,418 

$19,269 

10.4 


$76,993 

$68,638 

25-0 


830 
1,485 


Number of employees 


225 



Iron and Steel 



Number of establishments 

Average product 

Average capital 

Average number of em- 
ployees 



1850 


i860 


1870 


1880 


1890 


1900 


1910 


468 
$43,600 
$46,700 

53 


. 542 
$97,000 
$82,000 

65 


726 
$275,000 
$161,000 

103 


699 

$419,000 
$295,000 

197 


699 

$683,000 
$591,000 

250 


668 

$1,203,500 

$858,000 

333 


654 
$2,119,000 

$2,282,000 

426 



Percentage 

Increase 

1910 over 

1850 



40 
4,760 
4.787 



47. SOME SOURCES OF THE SUPPLY OF CAPITAL' 

The Census Bureau gives fairly complete data as to the wages 
and incomes of those engaged in manufacturing and in some other 
industries. This enables us to make a rough estimate of the earnings 
or income of the people of the United States. By leading industries 
this estimate is as follows: 



From The Wall Street Journal, January 13 and 10, 191 2. 



CAPITAL GOODS AS ECONOMIC FACTORS 



171 



Industry 


Persons Employed 


Wages and Salaries 


Earnings for Dis- 
tribution 


Manufacturing 

Railroads 

Mining 


7,405,313 
1,662,550 

851,438 
2,072,112 

358,808 
12,561,936 
10,558,265 


$4,365,613,000 
1,170,432,400 

574,720,650 
1,191,464,400 

430,569,600 
2,300,993,068 
5,329,848,660 


$2,219,472,000 
744,775,000 
338,626,296 
921,366,392 
215,285,277 
2,412,855,450 
3,627,199,400 


Merchandizing 

Banking 

Agriculture 

Other occupations 






35,470,422 


$15,363,641,778 


$10,479,519,815 



Wages and salaries, in the aggregate, are 50 per cent larger than 
the total net earnings available for distribution, notwithstanding 
that we have included with the latter the net earnings of farmers 
and planters, which, in a majority of cases, might, with equal logic, 
be classed with wages and salaries. Small farms are in the majority, 
and their owners as a rule earn no more than a high wage, or a fair 
salary. 

One of the surprising features disclosed by the financial history 
of 191 1 is the large amounts of new capital raised by railroad and 
industrial corporations in face of a general decline in earnings. When 
margins of profit are narrow and net earnings unusually small one 
would naturally suppose that supplies of new capital would be limited; 
but it is evident that the amount of new financing actually done last 
year was greater than that accomplished during any previous year 
since 1901. 

In the following exhibit is displayed the contrast between new 
capital raised on the one hand and railroad and industrial earnings 
on the other. 



New Financing 
Done 



Railroad Net 
(I. C. C. Figures) 



Earnings of 30 Industrial 
Companies 



1911 . 
1910. 
1909. 
1908. 
1907. 
1906. 
1905- 



?i, 739,487, 720 
1,518,272,579 
1,681,620,680 
1,423,199,371 
1,393,913,300 
1,637,013,350 
1,238,978,000 



15881,219,144 
940,076,364 
828,122,822 
787,882,414 
900,567,262 
848,836,771 
742,993,486 



$315,000,000'' 
365,435,284 
337,413,083 
318,200,752 
384,550,204 
356,302,339 
300,883,399 



• Partly estimated. 

In 1908 the amount of new capital raised increased in face of 
declining earnings; but the divergence was in part due to the fact 



172 MATERIALS FOR ELEMENTARY ECONOMICS 

that the earnings here given are in general, for fiscal years, whereas 
the financing done is for calendar years. Moreover, the amount of 
capital raised in 1907 had declined as one would naturally expect. 
In 191 1, however, the earnings of both calendar and fiscal years 
showed marked declines, and yet the amount of new capital raised 
increased more than $220,000,000, as compared with a gain of less 
than $30,000,000 in 1908. 

It is particularly surprising that the supply of investment funds 
should be so large in a year when railroad net earnings shrank 6 . i 
per cent, industrial earnings about 13.8 per cent, and agricultural 
earnings more than 9 per cent. Nor should it be overlooked that 
our total borrowings of European capital last year are estimated at 
only about $173,200,000, as compared with $340,500,000 the previous 
year. Almost beyond a doubt the explanation lies in the reinvest- 
ment of an unusually large proportion of the dividends and interest 
received by stock and bondholders, like insurance companies, and 
in the large accumulation of savings or "capital" by our great wage- 
earning and salaried classes. Wages and salaries greatly exceed 
dividends and interest; and a moderate increase in frugality on the 
part of these classes would seem a sufficient explanation. 

48. CAPITAL— DEMAND AND SUPPLY^ 

London, May 31. — The year 1913 promises to exceed all others in 
amount of new capital raised in this country. Indeed, the quantity 
of new securities is so vast that underwriters and others have begun to 
call a halt. 

The amount of new capital which this country can provide for 
new securities (apart from the capital needed for buildings and 
private enterprises) at the present time is, according to the Statist, 
somewhere about £220,000,000 a year, and no surprise need be felt 
that underwriters are becoming less and less keen to take new securi- 
ties, seeing that the amount placed in five months has been nearly 
£150,000,000. It is, of course, possible, that a much larger amount 
than an additional £70,000,000 may be subscribed before the end of 
the year, but in that case the instalments on the new issues must be 
extended well into 19 14. 

In recent years, continues the Statist, the amount of new capital 
annually subscribed in this country has somewhat exceeded £200,- 
000,000. The subscriptions have by no means been regularly spread 

' From The Journal of Commerce and Commercial Bulletin, 1913. 



CAPITAL GOODS AS ECONOMIC FACTORS 



173 



over the various parts of each year. Sometimes the amounts placed 
in the early part of the year have been large; at other times they 
have been small during that period. On some occasions the sub- 
scriptions are heaviest in the last quarter. Last year the total sub- 
scriptions reached £211,000,000 for the year, of which about one- 
half was raised in the first five months. In the period to the end of 
May of this year the subscriptions have been nearly £150,000,000, in 

Table I 

Purposes for Which Capital Was Subscribed in the United Kingdom 
IN THE First Five Months of the Last Two Years 



Description of Security 



First Five Months 



1913 



Government 

Municipal 

Railways 

Banks 

Breweries 

Commercial, industrial, etc 

Electric light and power 

Fin., land, investment and trust. 

Gas and water 

Insurance 

Iron, coal, steel and engineering. . 

Mines 

Motors and motor manufacturing 

Nitrate 

Oil 

Rubber 

Shipping 

Tea and coffee 

Telegraphs and telephones 

Tramways '. 

Total* 



£44 



47 



393,031 
075,516 
123,220 
944,965 



,126,323 
,103,028 
,614,322 
892,410 
132,430 
.895,964 
.829,550 
488,750 
110,000 
,446,100 
816,094 
.102,993 
109,750 
592,000 
,594,000 



£8,021,332 
9,466,946 

28,621,346 

3,020,000 

75,000 

15,096,625 

4,092,354 

6,481,350 

702,000 

132,500 

4,166,605 

3,087,823 

131,812 

2,087,781 
1,664,040 
8,023,812 
97,100 
2,614,970 
6,629,232 



£147,390,450 



£104,217,628 



*|NOTE.- 

Editors] 



-The arithmetical discrepancies occur in the original table {Statist, May 31, igi3).- 



comparison with £104,000,000 last year and £110,000,000 in 1891. 
In considering the amount of capital placed in the five months just 
ended we must not forget that the subscriptions in the last five months 
of 1913 were abnormally small, amounting to only £50,000,000, and 
that the instalments on loans placed last year which had to be paid 
in the early part of the present year were unusually light. Still, 
when all the circumstances are taken into account, it is obvious that 
the issues of new securities are heavier and faster than can be easily 
absorbed, and it is probable that after the end of June a halt will be 



174 



MATERIALS FOR ELEMENTARY ECONOMICS 



called until October in order that the accumulations of securities in 
the hands of the underwriters may be disposed of. 

In May, 1913, the new issues have reached the large total of about 
£38,500,000, in comparison with £29,000,000 in May last year and 
£24,000,000 in May, 191 1. Of the £38,500,000 subscribed for this 
month no less than £17,000,000 had been for government loans, con- 
sisting of £10,670,000 for Brazil and £6,675,000 for China. An 
exceptionally large amount of capital has been asked for by mis- 
cellaneous undertakings of various kinds and descriptions. 

Table II 

Destination of Capital Subscribed in the United Kingdom in the First 
Five Months of the Last Two Years 





First Five Months 




1913 


1Q12 


United Kingdom 

India and Ceylon 

British Colonies 


£22,871,317 

2,902,467 

58,701,120 

62,915,546 


£25,021,776 

3,222,818 

25,582,782 

50,390,252 


Foreign countries 






Total 


£147,390,450 


£104,817,628 



The purposes for which capital was raised in the United Kingdom 
for the five months are shown in Table I. 

Three-fourths of the new capital subscribed has been for foreign 
countries and the bulk of the remainder has been for the United 
Kingdom. The destination of the capital subscribed in May and in 
the first five months of the past two years is shown in Table II. 

Referring to the causes for the high rates that railroads and other 
large corporations are being forced to pay for funds, Henry Clews in 
his current market letter says: 

"The controlling influence in the stock market is the money situa- 
tion. By this is meant not so much the lack of ordinary loaning 
facilities, as serious inroads upon the available supply of capital. 
There is plenty of what is technically known as money in the country, 
but the demands for both credit and capital have been extraordinary 
for several years. This is a world-wide phenomenon. International 
trade has been running upon an unprecedented scale. Industrial 
development has progressed marvelously in all parts of the 



CAPITAL GOODS AS ECONOMIC FACTORS 175 

world, and the strain upon capital thus induced was seriously 
aggravated by the losses and hoardings of the Balkan war. We have 
been turning capital, which comes from savings only, from fluid into 
fixed forms with excessive rapidity, the result being temporary 
scarcity and high rates. In the United States the situation has been 
aggravated by home conditions. Trade was very active, and there 
followed a considerable expansion of credit. The home requirements 
for capital have been enormous. They have been held in restraint 
somewhat by recent high interest rates — the usual warning against 
excess. It is well known that many important issues are still pending 
for industrial, railroad, and municipal or state purposes. These 
high rates forced a readjustment of market values to new conditions, 
and the low rates at which some of the new issues, notably St. Paul 
and Baltimore & Ohio, have been placed, focused public attention 
upon the difficulties of the situation." 

49. WHAT IS MEANT BY DEPRECIATION' 

Depreciation is a comparatively new phrase in railroad accounting, 
and, judging from the articles which have appeared on the subject, 
there seems to be some confusion as to just what is meant. Does 
depreciation mean the loss of value in a car or an engine due to wear 
and tear ? If so, this sort of depreciation is amply covered by proper 
maintenance; in other words, it is usual when an engine or car goes 
into the repair shop, whether damaged in an accident or by legitimate 
wear, to replace its worn-out or damaged parts and restore it to its 
original condition. Repairs are classed as "running repairs," by 
which are meant the repairs necessary to keep equipment in safe 
running condition; and ''general repairs," by which are meant the 
repairs needed to restore the equipment to its original condition. 
There are plenty of cases on roads both in this country and in Europe, 
where locomotives and cars are so well maintained that there is no 
appreciable depreciation. Indeed, locomotives are running on 
English roads which are, though obsolete in many respects, as good as 
new, though fifty years old; and there are many cases upon roads in 
this country where engines and cars twenty-five years old have been so 
well maintained that they are as good as when originally built. 

In respect to buildings and other structures, their ultimate life 
depends entirely upon the character of maintenance and care. 

' Adapted from F. A. Delano, "The Application of a Depreciation Charge in 
Railway Accounting," /o;/rwa/ of Political Economy, XVI, 586-90 (November, 1908). 



176 



MATERIALS FOR ELEMENTARY ECONOMICS 



Wooden buildings well roofed and painted, repaired when necessary, 
will last indefinitely, and of course, structures of masonry or iron are 
even more permanent. Buildings and structures on railroads are 
rarely discarded except because they have outlived their usefulness, 
and something of a more efficient type is needed in their place. 

From the foregoing it will be seen that if by depreciation is meant 
the loss due to wear and tear, it may be illustrated as to each piece of 
equipment or each building or structure, by a mathematical curve 
something like that indicated in the accompanying Diagram I. The 
distance from "A" to "B" represents the period of time in which 
under normal conditions the deterioration takes place; in the case of 
locomotives, say three years; in the case of passenger cars, say two 
years; in the case of freight cars, a very variable quantity, averaging 

Diagram I 

Curve illustrating condition of equipment, buildings, or structures over a long 
period of time. Space along vertical lines represents value of equipment, etc. 
Space along horizontal lines represents time interval 



100% 



80 



60 



40 




perhaps three years; in the case of buildings and structures, depending 
wholly on the character of the building and structure, climatic condi- 
tions, etc. The distance from "A" to " C" represents the diminution 
in value due to wear and tear down to the point where it becomes 
necessary to make extensive repairs. This is one view of what is 
meant by depreciation. 

Another view of depreciation is that it represents the amount by 
which the average condition of the physical property has deteriorated 
below the original or new condition. It is assumed that each piece of 
physical property on the railroad, other than the real estate, is 
depreciating in value in the way represented by the curve already 
drawn, but that because the railroad is a composite of an immense 
number of units, the average condition of all the separate units 
combined is represented by a line at some point between the upper 
and lower nodes of this curve. Obviously, this will vary a little bit on 
the different roads according to the personal equation of management. 



CAPITAL GOODS AS ECONOMIC FACTORS 



177 



local conditions, etc., which in turn are affected by good or bad 
business conditions, A corporation differs from an individual only in 
degree. In good times, expenditures for maintenance are liberally 
made : in hard times all expenditiu-es of this kind which can be safely 
postponed necessarily cease. If then by depreciation is meant the 
drop from the original cost down to the average-condition value of 
equipment, buildings or structures, it is evident that there is a line, or 
more accurately, a band or zone somewhere between 100 per cent value 
and the 50 per cent value, and this band, speaking very liberally, will 
be somewhere between 60 per cent and 75 per cent of the original cost. 
It is obvious, however, that when the lower limit of this band which 
represents the average condition of the units is reached, depreciation 
does not continue farther, and that therefore if a regular fixed charge 

Diagram II 

The result of composite curves similar to those shown below is a line or more 
strictly a band or zone representing average condition 



100% 




is to be made to cover this alleged loss of value the charge should cease 
at that point as the limit of actual depreciation of the units considered 
as a whole has been reached. 

Still a third view of depreciation is that it means the depreciation 
due to "obsolescence." It is argued that while each piece of equip- 
ment or every building or structure may be restored to its original 
condition, there is a diminution in value, due to obsolescence. Every 
manufacturer, as well as every corporation, fully appreciates this. In 
a country which is developing rapidly it is frequently necessary to 
discard perfectly good equipment, buildings, and structures, and to 
replace them with something more efficient. It is possible that con- 
ditions will warrant "writing off" the cost of such equipment or 
structures and charging to cost of operation the entire cost of renewal 
with more modern and more efficient tools or equipment. It may be 
argued that this is the kind of depreciation which it is the business of 
the railroad to provide for by monthly charge in its operation. The 
difficulty is to estimate the rate at which such depreciation takes place. 



178 



MATERIALS FOR ELEMENTARY ECONOMICS 



To illustrate it, we may represent such a depreciation as this by a 
mathematical curve for each piece of equipment, building and struc- 
ture, as shown in Diagram III. The difference between the curve in 
Diagram III and that of Diagram I lies in the fact that Diagram III 
shows a depreciation due to obsolescence, whereas Diagram I does not. 
In III we make a line "A — D," which is at a slight angle to the 
horizontal. It represents the rate of depreciation due to obsolescence. 
It contemplates that every time a unit of equipment, a building or a 
structure, is restored to a condition "as good as new," it is not brought 

Diagram III 

Diagram showing condition of equipment, buildings, and structures as in Diagram I, 
but taking into account depreciation due to obsolescence 
Rate or Depreciation Due to Obsolescence 



ioo% 



80 



60 



40 




back to a value equal to that represented by its original cost, but to 
a value as much less than its original cost as the depreciation due to 
obsolescence may have brought it. To provide for this sort of 
depreciation it is obviously necessary to determine the rate of deprecia- 
tion due to obsolescence. Who shall say ? Shall we be guided in the 
future from the results in the past ? Shall we say in respect to loco- 
motives that because locomotives are now as high, as wide, and 
perhaps as long as they may be built, there can be no further develop- 
ments in that direction ? Or, shall we accept the arguments of those 
who believe in electric transportation, that the steam locomotive will 
soon be discarded and the electrically driven motor take its place? 
In one case, the rate of depreciation due to obsolescence will be small, 
while in the other case, it can be determined only by our surmise as to 
how soon the revolution from steam to electricity is going to take place. 



CAPITAL GOODS AS ECONOMIC FACTORS 179 

50. INROADS OF WAR ON THE SAVABLE FUND* 

It would seem desirable at this point, now that all feeling in regard 
to the subject from its bearing on political questions has apparently 
passed away, to place upon record the exact cost of the war, as nearly 
as the same can be determined. With this object attention is asked 
to the following exhibit: 

The amount of outstanding national indebtedness 

March 7, 1861, was $76,455,299. 28. 
During the four years of war which terminated in April, 

1865 (April I, 1861, to April i, 1865), the actual 

receipts of the treasury, were as follows: 

From internal revenue $314,337,317.01 

From customs 280,861,618.45 

From lands 1,812,083.80 

From direct tax. . . . : 4,668,259.31 

From miscellaneous sources 74,120,413.37 

Total receipts $675,799,691 . 94 

The receipts of revenue from April i, 1865, to June 30, 

1869, inclusive, during which period the larger portion 

of the expenditures has been directly in consequence 

of the war, were as follows: 

From internal revenue $967,207,221.41 

From customs 729,991,875.97 

From lands 7,402,188. 28 

From direct tax 9,017,217.30 

From miscellaneous sources 194,949,122. 13 

Total receipts $1,908,576,625.09 

The amount of outstanding indebtedness, less cash and 
sinking fund in treasury, June 30, 1869, was $2,489,- 
002,480. 58. 

Deducting from this the amount of outstanding in- 
debtedness at the outbreak of the war ($76,455,- 
299. 28), we have, as the sum borrowed for war pur- 
poses and not repaid out of the receipts above in- 
dicated $2,412,547,181.30 

making the total expenditure (loans and receipts) 
in eight and a quarter years of war and its effects $4,996,914,498 . SS 
Deducting the amount which, but for the war, might be 
taken as the average expenditure of the government 
during this period, say $100,000,000 per annum 825,000,000.00 

We shall have $4,171,914,498.33 

' From the Report of the Special Commissioner of (he Revenue (1869), pp. iv-vi. 



l8o MATERIALS FOR ELEMENTARY ECONOMICS 

which sum represents the cost of the war to the United States govern- 
ment down to June 30, 1869. 

To this sum should be added the value of the pensions now paid 
by the government on account of the war, if the same were capitalized. 
This at eight years' purchase of the present annual payment, would 
amount to about two hundred millions. 

But this aggregate, however large, must still further be increased 
by other items if we would reach the true cost of the war to us as a 
people, the above representing only the expenditures of the national 
government. 

These additional charges are substantially as follows: 

Increase of state debts, mainly on war account $123,000,000.00 

County, city, and town indebtedness increased on 

account of the war (estimated) 200,000,000. 00 

Expenditures of states, counties, cities, and towns, on 

account of the war, not represented by funded debt 

(estimated) 600,000,000 . 00 

Estimated loss to the loyal states from the diversion and 

suspension of industry, and the reduction of the 

American marine and carrying trade 1,200,000,000.00 

Estimated direct expenditures and loss of property by 

the Confederate states by reason of the war 2,700,000,000.00 

These estimates, which are believed to be moderate and reasonable, 
show an aggregate destruction of wealth, or diversion of industry, 
which would have produced wealth in the United States since t86i 
approximating nine thousand millions of dollars — a sum nominally 
in excess of the entire increase of wealth, as returned by the census 
for the whole country from 1850 to i860. 

This, then, was the cost of the destruction of slavery; the cost 
of compromise; the cost of the unfaithfulness of those who founded 
this nation to the idea by which the nation lives. What does it 
measure? It is substantially a thousand millions a year for nine 
years; or at the wages of five hundred dollars a year, the labor of 
two millions of men exerted continuously during the whole of that 
period. It is three times as much as the slave property of the country 
was ever worth. It is a sum which at interest would yield to the end 
of time twice as much as the annual slave product of the South in its 
best estate.' 

' [Cf. in this connection the charts showing federal expenditure and the 
national debt (Selections 239 and 242). — Editors.) 



VI. THE ORGANIZATION OF INDUSTRY 

A. SPECIALIZATION 
51. LIMITATIONS OF THE DIVISION OF LABOR' 

The division of labor, as all writers on the subject have remarked, 
is limited by the extent of the market. It can only be advantageously 
carried to the extent which will produce the quantity demanded. The 
extent of the market may be limited by several causes: too small a 
population; the population too scattered and distant to be easily 
accessible; deficiency of roads and water carriage; or, finally, the 
population too poor, that is, their collective labor too little effective, 
to admit of their being large consumers. Indolence, want of skill, 
and want of combination of labor, among those who would otherwise 
be buyers of a commodity, limit, therefore, the practicable amount of 
combination of labor among its producers. In an early stage of civil- 
ization, when the demand of any particular locality was necessarily 
small, industry flourished only among those who by their command 
of the sea-coast or of a navigable river, could have the whole world, or 
all that part of it which lay on coasts or navigable rivers, as a market 
for their productions. The increase of the general riches of the world, 
when accompanied with freedom of commercial intercourse, improve- 
ments in navigation, and inland communication by roads, canals, or 
railways, tends to give increased productiveness to the labor of every 
nation in particular, by enabling each locality to supply with its special 
products so much larger a market, that a great extension of the 
division of labor in their production is an ordinary consequence. 

The division of labor is also limited, in many cases, by the nature 
of the employment. Agriculture, for example, is not susceptible of so 
great a division of occupations as many branches of manufactures, 
because its different operations cannot possibly be simultaneous. 
One man cannot be always ploughing, another sowing, and another 
reaping. A workman who practiced only one agricultural operation 
would be idle eleven months of the year. The same person may 
psrform them all in succession, and have, in almost every climate, a 
considerable amount of unoccupied time. To execute a great agricul- 

' Adapted from John Stuart Mill, Principles of Political Economy, Book I, 
chap. viii. 

181 



1 82 MATERIALS FOR ELEMENTARY ECONOMICS 

tural improvement, it is often necessary that many laborers should 
work together; but in general, except the few whose business is 
superintendence, they all work in the same manner. A canal or a 
railway embankment cannot be made without a combination of many 
laborers; but they are all excavators, except the engineer and a 
few clerks. 

52. THE TIN-PEDDLER AND THE DEVELOPMENT OF CON- 
NECTICUT INDUSTRIES^ 

Among the factors that have promoted industry in New England 
one is usually overlooked, namely, the service rendered by the Yankee 
tin-peddler in marketing the products of the manufacturing plants. 

In Connecticut few places outside the rich river valleys where the 
first colonists had settled gave adequate return for the efforts of 
farmers in tilling the thin, rocky soil. The settlers were thus com- 
pelled to find employment other than farming, or to emigrate to lands 
more generously endowed by nature. One of the earliest breaks 
from the traditional occupation of agriculture was the manufacture 
of tinware. This industry was introduced at Berlin, Conn., in 1740, 
by two Irish immigrants, the brothers William and Edward Pattison, 
who imported sheet tin from England and worked it into kitchen 
utensils at their Berlin home. Since all tinware had previously been 
imported, and was very expensive, the brothers' cheaper articles 
found ready sale. When their home market had been supplied, they 
began the practice of making journeys on foot to near-by settlements, 
with their wares carried on their backs in a sack. The success of 
these ventures induced other Berliners to make tin and carry it to 
neighboring colonies. At first the journeys were made on foot, then 
on horseback, and finally in an ingeniously arranged wagon. As the 
country opened, and turnpikes and canals were built, the peddler's 
wagon traveled farther and farther from home. Gradually a dis- 
tributing organization was perfected that reached every village and 
remote hamlet. 

As an industry, tin manufacturing was too simple to become very 
important, although it continued in Connecticut until 1 850. But the 
selling organization built up for tin was very important because it 
provided an adequate outlet for other industries in which the manu- 

' Adapted from a note by R. Malcolm Keir in The Journal of Political 
Economy, XXI, 255 (March, 1913). 



THE ORGANIZATION OF INDUSTRY 183 

facturing processes were not simple, and which employed more and 
more men at home. It was in building up these industries that have 
been permanent valuable assets to the state, by enabling the products 
of the industries to reach their markets, that the peddler's great 
service was rendered. Lack of transportation was the greatest natural 
throttle to early American manufacturing. Carrying charges soon 
ate up any profits an industry might have, and limited it to a very 
narrow local field. However, if those products were small in bulk, 
with a relatively high value and a brisk demand, transportation diffi- 
culties were solved by placing the articles in the hands of the peddler. 
If there had been no peddler there would have been no way for the 
producers of the goods to reach the consumers, and hence no 
production. 

Today the peddler is seldom seen. Railroads and cross-country 
trolley freight lines have driven him out of existence. In remote 
communities occasionally he may be met. In his time he rendered 
the service of transportation agent and salesman, linking scattered 
consumers to producers and giving to incipient manufacture the 
opportunities of a widened market.' 

53. CLASSIFICATION OF OCCUPATIONS 

The following schemes of classification, from the Index to Occupa- 
tions issued by the United States Bureau of the Census, indicate the 
method of classification which has been adopted for the Census of 1910. 

I. Industries and Industrial Groups^ 
(a) extractive industries 

I. Agriculture, Forestry, and Animal Husbandry: 
Agriculture 
Forestry 

Animal husbandry 
II. Extraction or Minerals: 
Mining 
Coal mines 
Copper mines 
Gold and silver mines 

'[On this topic see also Selection 74: "Widening of the Market Through 
Improved Transportation." — Editors.1 

' From the Classified Index to Occupations, Thirteenth Census of the United 
States (1910), pp. vi-viii. 



1 84 MATERIALS FOR ELEMENTARY ECONOMICS 

Iron mines 

Lead and zinc mines 

Other mines 

Mine workers (mine, not specified) 
Quarrying 

Quarries (stone, cement, sand, clay, etc.) 
Production of salt, oil, and natural gas 

Production of salt 

Production of oil and natural gas 

(b) industries of transformation, transportation, and trade 

III. Manufacturing and Mechanical Industries: 
Building trades 

(Listed as building and hand trades under Miscellaneous industries) 
Chemi als and allied products 

Fertilizer makers 

Paint makers 

Powder, cartridge, dynamite, fuse, and fireworks makers 

Soap makers 

Other chemical workers 
Clay, glass, and stone products 

Brickmakers 

Pot.teries 

Tile makers 

Glass 

Terra-cotta workers 

Lime, cement, and gypsum 

Marble and stone cutters 
Clothing 

Clothing makers (suits, coats, cloaks, and overalls) 

Clothing makers (other than suits, coats, cloaks, and overalls) 

Corset makers 

Glove makers 

Hat makers (wool or felt) 

Shirt, collar, and cuff makers 
Food and kindred products 

Bakeries 

Butter and cheese makers 

Candy 

Fish curers and packers 

Flour and grain mills 

Fruit and vegetable canners, picklers, and preservers 

Slaughter and packing houses 



THE ORGANIZATION OF INDUSTRY 185 

Sugar makers and refiners 

Other food preparers 
Iron and steel and their products 

Agricultural implements 

Automobile factories 

Car and railroad shops 

Foundries and metal working 

Iron and steel mills 

Ship and boat building 

Wagons and carriages 

Othe.- iron and steel workers 
Leather and its finished products 

Harness and saddle makers and repairers 

Leather-belt, leather-case, and pocketbook makers 

Shoes 

Tanneries 

Trunk makers 
Liquors and beverages 

Breweries 

Distilleries 

Other liquor and beverage workers 
Lumber and Us remanufacture 

Box makers (wood) 

Furniture 

Pianos and organs 

Saw and planing mills 

Other woodworkers 
Metals and metal products except iron and steel 

Brass mills 

Clock factories 

Copper factories 

Gold and silver workers 

Jewelry factories 

Lead and zinc factories 

Tin-plate factories 

Tinware factories 

Watch factories 

Other metal workers 
Paper 

Box makers (paper) 

Makers of blank books, envelopes, tags, paper bags, etc. 

Paper mills 

Pulp mills 



1 86 MATERIALS FOR ELEMENTARY ECONOMICS 

Printing and bookbinding 

Printing and publishing establishments 
Textiles 

Carpet mills 

Cotton mills 

Dyeing and finishing textiles 

Hemp and jute mills 

Knitting mills 

Lace and embroidery makers 

Linen mills 

Print works 

Rope and cordage factories 

Sail, awning, and tent makers 

Silk mills 

Woolen mills 

Worsted mills 

Not specified textile workers 
Miscellaneous industries 

Broom and brush makers 

Button makers 

Charcoal and coke burners 

Cigars 

Electric light and power companies 

Electrical supplies 

Gas works 

Oil works 

Rubber factories 

Straw workers 

Tobacco 

Turpentine distillers 

Building and hand trades 

Other miscellaneous industries and occupations 

Workers in "Not specified" manufacturing and mechanical 

industries 

IV. Transportation: 
Water transportation 

Water transportation 
Road, street, and bridge transportation 

Construction and maintenance of streets, roads, sewers, and bridges 

Livery stables 

Truck, transfer, cab, and hack companies 

Street railways 
Transportation by railroad 

Transportation by railroad 



THE ORGANIZATION OF INDUSTRY 187 

Express companies 

Express companies 
Post, telegraph, and telephone 

Post 

Telegraph and telephone 
Other persons in transportation 

Other persons in transportation 
V. Trade: 

Banking and brokerage 

Insurance 

Real estate 

Wholesale and retail trade 

Elevators 

Stock yards 

Warehouses and cold-storage plants 

Other persons in trade 

Clerical assistants 

(c) SERVICE 

VI. Public Service (not Elsewhere Classified): 
Public administration 
Federal officials and employees 
State officials and employees 
County officials and employees 
City or town officials and employees 
Public defense and maintenance of law and order 
National defense 

Army 

Navy 
Maintenance of law and order 

United States marshals 

County sheriffs 

City marshals 

Constables 

Detectives 

Guards in parks, prisons, public institutions, and public buildings 

Policemen 

Probation and truant officers 

Watchmen 
VII. Professional Service: 

(Whole class) 
VIII. Domestic and Personal Service: 
Occupations not in industries 
Laundries and laundry work 



MATERIALS FOR ELEMENTARY ECONOMICS 



II. Division of Labor within a Typical Industry — Cotton 

Mills' 



Manufacturers and pro- 
prietors 

Officials 

Managers and superin- 
tendents 

Foremen and overseers 

Clerks 

Apprentices 

Back boys 

Bailers 

Banders 

Beaders 

B earners 

Bobbin boys 

Breaker hands 

Card clothiers 

Card fixers 

Card grinders 

Card strippers 

Carders 

Carpenters 

Chainers 

Cleaners 

Cloth balers 

Cloth cutters 

Cloth menders 

Cloth steamers 

Combers 

Cotton shakers 

Creelers 

Designers 

D offers 



Doublers 
Drawers-in 

Drawers and drawing- 
frame tenders 
Dressers 
Drillers 
Dryers 
Dyers 
Engineers 
Filling carriers 
Finishers 
Folders 

Harness brushers 
Harness makers 
Helpers 
Inspectors 
Jack-frame tenders 
Laborers 
Lappers 
Loom fixers 
Machinists 
Nappers 
Oilers 
Packers 
Pickers 
Piecers 
Pressmen 
Printers 
Quillers 
Reelers 
Ribbers 



Roll coverers 

Rollers (cloth) 

Ropers 

Rovers 

Roving-frame tenders 

Scrubbers 

Section hands 

Sewers and Seamers 

Shearers 

Sizers 

Slasher tenders 

Slubber tenders 

Sorters 

Spare hands 

Speeders 

Spinners 

Spoolers 

Spool fixers 

Stampers 

Starchers 

Sweepers 

Trimmers 

Twisters 

Warpers 

Washers 

Weavers 

Winders 

Wrappers 

Yarn pourers 

Other occupations 

Not specified 



The several occupations as shown in Classification II are subject 
to still further division. 

Thus the item "Laborers" is subdivided as follows: 



Laborer, room, cotton mill 
Laborer, thread mill (cotton) 
Laborer, wadding mill (cotton) 
Opener, cotton bale 
Trucker, cloth, cotton mill 
Trucker, cotton mill 



Day laborer, cotton mill 

General hand, cotton mill 

Laborer, bleaching (cotton) 

Laborer, cotton mill 

Laborer, cotton waste 

Laborer, finishing company (cotton) 

Laborer, gingham mill (cotton) 

- It is estimated that the Census Index designates in the aggregate 
between 7,000 and 8,000 distinct occupations. 

' From the Classified Index to Occupations, Thirteenth Census of the United 
States (1910), pp. 211-18. 



THE ORGANIZATION OF INDUSTRY 



iSg 



54. STAGES IN THE PRODUCTION OF IRON AND STEEL 
PRODUCTS' 

An idea of the sequence of the stages in the production of iron 
and steel commodities may be obtained from the following diagram: 

Tj_j„ /Wire, wire nails, and wire 
^""^^X products 
Large billets jMercha^t^bars 

Splice bars 
Hoops and bands 

I Merchant bars 
C^ttontiS^ 
Seamless tubes 

Blooms \ [Sheets, galvanized and other fin- 

ished 
Black plate for /Tin plate and 
tinning \ tern plate 



Steel-making 

iron: 

Bessemer 

Basic 



Ore 1 § 

Coke [ iH 

Limestone J .Sf 



Ingots 



Slabs 




Bridge and other fabricating ma- 
terial 



Wrought pipe and tubing 



Castings Forgings 
Foundry iron Castings 

Malleable Bessemer iron Castings Malleable castings 

Forge iron Muck bar Merchant bar iron and other rolled-iron products 



55. THE LOCALIZATION OF MANUFACTURING INDUSTRIES^ 

Some of the various advantages which influence the localization 
of industries may be stated as follows: (i) nearness to materials; 
(2) nearness to markets; (3) water-power; (4) a favorable climate; 
(5) a supply of labor; (6) capital available for investment in manu- 
factures; (7) the momentum of an early start; (8) the habit of 
industrial imitation; (g) economic advantages of specialized centers. 

I. Nearness to materials. — The localization of several of the indus- 
tries illustrates this advantage — the paper industry near the spruce 

' From the Report of the United States Commissioner of Corporations on the 
Steel Industry, Part III (1913), p. 13. 

' Adapted from the Twelfth Census of the United States (1900), Vol. VII, pp. 
ccx-ccxiv. 



IQO MATERIALS FOR ELEMENTARY ECONOMICS 

and poplar forests; the tanning industry near the chief tanning 
materials; slaughtering and meat-packing near the stock-raising 
centers; the manufacture of agricultural implements near the great 
hardwood forests and the iron-producing centers; the pottery in- 
dustry near its clay; the recent growth of cotton manufacturing 
near the cotton fields; and the beginnings of shoe manufacturing 
in Massachusetts near the supply of leather. 

Fuel is regarded, for census purposes, as a material of manufacture, 
and the influence of its supply is very marked in the localization of 
the glass industry near the natural gas wells, and in the iron industry 
in Pennsylvania and Alabama. 

2. Nearness to markets. — This is an important factor in the locali- 
zation of all industries, its influence upon the localization of manu- 
facturing in general being especially apparent. Nearly 48 per cent 
of the manufacturing of the country is in Massachusetts, Connecticut, 
Rhode Island, New York, New Jersey, and Pennsylvania — not so 
much because there is better water-power or more abundant material 
for manufactures in these states, but very largely because the greatest 
population was there when the manufacturing developments of the 
country began. The influence of the market in causing a migration 
of manufacturing in general may be observed by comparing the 
movement of the center of manufactures and of the center of 
population since 1850. The center of manufactures has moved 
steadily westward, following roughly the movement of the center 
of population. 

Eight of the fifteen selected industries' are localized east of the 
Alleghenies, chiefly because they became established in this section at 
a time when it was the only important market in the country. In 
certain of the industries the influence of the market upon the locali- 
zation has been especially marked, i.e., the iron and steel industry 
in Illinois, the manufacture of agricultural implements, the paper 
and pulp manufacture, and the jewelry and silk industries. 

Nearness to materials and nearness to markets, in so far as these 
expressions are used with reference to an effect upon localization, 

^ These industries are: (i) agricultural implements; (2) boots and shoes, 
factory product; (3) collars and cuffs; (4) cotton goods, including small cotton 
wares; (s) fur hats; (6) glass; (7) hosiery and knit goods; (8) iron and steel; 
(9) jewelry; (10) leather gloves and mittens; (11) leather, tanned, curried, and 
finished; (12) paper and wood pulp; (13) pottery, terra cotta, and fire-clay prod- 
ucts; (14) silk and silk goods; (15) slaughtering and meat-packing, wholesale. 



THE ORGANIZATION OF INDUSTRY 191 

mean more than mere geographical distance. They include the 
general accessibility to materials or markets, affected as this is by the 
supply or lack of good and cheap means of communication. Water- 
ways have thus had a tremendous influence upon the localization of 
industries, for they have allowed localities through which they passed 
to make an early start in manufacturing, and by the momentum thus 
acquired to retain their prominence in many cases, even after the 
building of railroads has removed the special advantages which they 
at first possessed. 

It is evident, moreover, that the importance of the two advantages 
just explained varies greatly among the several industries according as 
their products are easily and cheaply transportable or are transported 
only with great difiiculty and at a great expense. In all industries 
where the product is not transportable, such, for example, as the 
construction of houses, the market controls the localization absolutely. 
It is plain, also, that the power of materials and market over industry 
is less, just in proportion as the materials and products are more 
easily and more cheaply shipped. From the manufacturer's stand- 
point it is always a counting of the costs of shipment. If these are 
heavy, the industry tends to locate where the amount of transporta- 
tion will be least, but if they are light, the influence of materials and 
market is so slight that it often disappears altogether. The words 
"heavy" and "light," as used in this connection, are not to be under- 
stood in an absolute sense, but relative to the value of the material 
or product transported. A cheap and heavy raw material, such as 
clay, will be carried only a very short distance. Transportation 
charges, after a few hundred miles, would constitute too large a part 
of the cost of manufacture. But an equal weight of this same clay 
after its value has been trebled by being converted into pottery might 
be carried a long distance before the shipping costs would become 
prohibitory. 

3. Water-power. — This has been in the past a very important 
advantage, but today its influence upon localization of industries is 
not very apparent. Naturally, this influence was greatest before 
the days of steam. All industries requiring power grouped them- 
selves along those waterways which had a good natural fall. This 
early impetus, combined with forces to be described later, has tended 
to perpetuate such industries in their original locations, even when 
steam has become more important, as a source of power, than 
water. 



192 MATERIALS FOR ELEMENTARY ECONOMICS 

It is interesting in this connection to compare the manufacture 
of cotton goods with the manufacture of shoes. Power has been 
applied to some branches of the cotton manufacture for more than a 
hundred years, while shoe manufacturing has been a power industry 
less than half that time. Largely as a result of this fact, water 
supplies 31 per cent of the power used in the cotton industry today, 
and but 4 . 6 per cent of that used in the manufacture of shoes. That 
is to say, the localization of both industries began in the early days, 
but the manufacture of shoes, being for years a hand industry, was 
independent of water-power, while the cotton manufacture, of neces- 
sity, sought the waterways. When the necessity for power in the 
shoe manufacture arose, the industry was too thoroughly established 
away from the sources of water-power, and recourse was had to steam. 
Water-power has been an important factor in the localization of three 
of the other industries specified above — silk goods, hosiery and knit 
goods, and the pulp manufacture. 

4. A favorable climate. — This has also an influence which is dis- 
cernible in the localization of industries. The influence of a moist 
climate, which is also even throughout the day, upon cotton spinning 
in New Bedford and Fall River, Mass., is a conspicuous instance. 
More often, however, the advantage of a favorable climate makes 
itself felt through its invigorating effect on labor. 

5. A supply of labor. — Two other advantages must be mentioned, 
for there are times when they have considerable weight. These are 
the supply of labor and the supply of capital and credit facilities. 
The "supply of labor" is something far from mobile. It is very 
human, with all the attachments of home and friends. It can be 
easily lured into a new industry which is established "at home" or 
near by, but the wages paid must be considerably greater to attract 
it into other sections. Manufacturing industries tend, therefore, to 
become established in a section where there is a good supply of labor. 
The New England towns have been pre-eminently of this type. All 
about them were farms which had reached the point of exhaustion, 
and could therefore employ profitably only a small part of the rising 
generation. The surplus labor thus created gravitated naturally to 
the nearest town in search of employment and the early development 
of numerous manufactures was thus made easy. For opposite reasons 
there can be no extensive manufacture in those parts of the West 
where the increasing population is mostly absorbed in agriculture, 
which is still incompletely developed. 



THE ORGANIZATION OF INDUSTRY 193 

6. A supply of capital. — It is almost equally important to have a 
supply of local capital. Although most large enterprises are now 
financed from the great financial centers, the plants are located usually 
in places which have already become industrial centers in a smaller 
way through the efforts of the people there, and by means of their 
money. The cotton mills which are springing up through the South 
just now illustrate the tendency of a town to own itself in the early 
stages of its industrial life, and Fall River affords a most remarkable 
illustration of the perseverance of this tendency. A prosperous town, 
therefore, where the people are ''making money," is, in so far, a 
favorable locality for the establishment of manufacturing industries 
of some sort. Outside capital will undoubtedly be solicited, but it 
will be obtained more easily and more surely after the people them- 
selves "have taken largely of the stock." Banking facilities exert a 
similar influence, making the community's capital more available for 
investment than it would otherwise be. All of these considerations 
have operated to favor the early development of manufacturing cen- 
ters in New England and the Middle Atlantic states, agriculture 
absorbing a large share of the available local capital in the southern 
and western states. One of the causes which led to the establishment 
of the cotton manufacture in New Bedford about 1850 was the supply 
of local capital set free about that time by the decline in the whaling 
industry. 

7. The momentum of an early start. — The various advantages 
which have been described thus far can be expressed in dollars and 
cents. The places possessing these advantages attract manufacturers 
on account of the comparatively low cost there of producing and 
marketing goods. But these advantages, in almost all cases, account 
for localization only in its broader sense. They prescribe an industry's 
possible area, but they fail to explain the most marked form of 
localization — that within a single city or town, or group of cities 
and towns. 

Somewhere within the possible area — made such because of the 
advantages just described — an enterprising man started the pioneer 
establishment of a certain industry. Why was this place chosen 
rather than any other within the possible area? Or why was this 
industry chosen rather than any other for which this place was suited ? 
This is the first problem, and the second follows naturally: Why, 
after the first factory had become established, was it to the advantage 
of competitors to choose the same spot for their establishments, rather 



194 MATERIALS FOR ELEMENTARY ECONOMICS 

than other localities within the possible area? The solution of the 
first problem in the case of any industry is to be found by reference 
to its early history in this country. 

In most cases it will be found that the original establishment of 
an industry in a locality was largely a matter of chance. The shoe 
industry in Lynn, Mass., is a case in point. In the early colonial 
days this settlement had its quota of cobblers, who made as well as 
repaired the shoes for the region thereabout, but did not attempt a 
broader market. In 1750, however, John Adams Dagyr, a Welshman 
and a skilled shoemaker, settled in Lynn, and began to teach his 
apprentices the art of fine shoemaking. It soon became known that 
shoes were being made in Lynn nearly as good as the best made 
abroad, and as early as 1764 Dagyr was spoken of in a Boston news- 
paper as "the celebrated shoemaker of Essex." Had this man settled 
in Roxbury, Mass., rather than Lynn, the bias toward shoe manufac- 
turing might have become established in that quarter, and Roxbury 
instead of Lynn might today be one of the three great shoe centers 
of the United States. 

The nature of many a city's industry has been shaped in just this 
way, in the early days of its history, by the decision of one man. 
Instances of this might be cited in connection with the localization 
of collars and cuffs, hosiery and knit goods, jewelry, gloves, and 
fur hats. 

The decision of the pioneer in an industry at a given point rests 
on various grounds. He establishes usually an industry with which 
he is familiar because of experience obtained elsewhere. Several of 
the above selected industries have been established in their respective 
localities by the emigration from Europe of individual skilled work- 
men or groups of skilled workmen. The town where such a man 
chances to settle is taken for a location of the industry, in most cases, 
without much questioning whether or not it is better adapted for it 
than any other town. But if he searches for a suitable place, his 
chance acquaintance with one locality, or the offer of a friend to assist 
him if he establishes there, often influences his decision at the expense 
of another and perhaps more suitable locality where he has never 
visited, or where no acquaintance appeared to offer inducements. 
In many instances towns offer inducements to manufacturers, such 
as exemption from taxation for a period of years, and such efforts 
have often been successful in building up an entirely new industry in 
the town. 



THE ORGANIZATION OF INDUSTRY 195 

But, if the industry is to be perpetuated and to increase in the 
locality, the original establishment must succeed, for it is the influence 
of its success which causes other establishments to spring up around 
it. In the early history of every industry numerous enterprises fail, 
not so much because of the unfitness of the locality chosen, as because 
of the unfitness of the man who attempts to carry on the industry at 
that point. 

8. The habit of industrial imitation. — It is only after the first 
enterprise has succeeded in any locality that the real localizing 
process begins. The mainspring of this process is the habit of indus- 
trial imitation — a habit as powerful as it is universal, and so impor- 
tant in this connection that it warrants a somewhat closer analysis. 

It has been shown above that one of the normal requisites of an 
industrial locality is a good supply of local labor and local capital. 
Suppose the enterprising man establishes himself in such a community 
and succeeds there. His success proves that the economic conditions 
are favorable — that he is within the possible area of that industry. 
But it does more, it creates a local bias toward this particular industry. 
This bias affects all three classes necessary to its expansion: entre- 
preneurs, capitalists, and laborers. 

In the first place entrepreneurs naturally choose the existing 
industry rather than estabUsh a new one. On the assumption of a 
prosperous and growing town, there is continually arising a class of 
enterprising men who wish to embark in manufacturing for them- 
selves, and they naturally choose an industry with which they are 
familiar — one which they have actually seen succeed. It requires 
courage to be an industrial pioneer; more courage, in fact, than most 
men possess. They have read, perhaps, of much larger profits being 
made in branches of manufacturing not carried on in their neighbor- 
hood; they may have visited towns in another part of the country 
where some such industry has been very successful, and they are 
tempted to establish this industry in their town, rather than to imi- 
tate the establishment which has been operating there successfully. 
The chances are great, however, that they will resist the temptation 
of larger profits in favor of what they regard as surer profits, and will 
choose the local industry. The other industry may be just as safe, 
but the probability of success, if they follow the beaten path, has been 
emphasized to them each day as they have watched the smoking 
chimney of the local factory, and have noticed the rise of the pro- 
prietor from moderate circumstances to comparative affluence. Their 



196 MATERIALS FOR ELEMENTARY ECONOMICS 

choice of this industry becomes, therefore, almost inevitable. More- 
over, it is probable that the men who thus launch out for themselves 
have been employes or foremen in the local factory. They are rela- 
tives, perhaps, of the proprietor, and are familiar with all the details 
of this industry, while in any other they would have all to learn. 
This last feature has been illustrated in fully half of the industries 
specified above. 

In the second place, the capital needed to finance the new estab- 
lishment — in addition to that supplied by the new entrepreneur him- 
self — is much more easily obtained if the new establishment is to 
produce the same line of goods as the one already in existence. If a 
loan is desired for the establishment of an outside and less familiar 
industry, there is naturally a raising of the interest rate as a means of 
insurance; or the stock, if offered for sale, will for the same reason 
sell at a lower figure.^ 

In the third place, the best grade of local labor prefers to have 
employment in an industry which seems to offer a future rather than 
in one which seems in the nature of an experiment. This influence 
is comparatively slight, however, for all ordinary labor takes such 
employment as is offered without much questioning. 

9. Economic advantages of specialized centers. — All the above deci- 
sions — the decision of the pioneer in the industry, and the decisions 
of the few who follow immediately in his steps — seem to be made with 
but little consideration of the economic advantages which the locality 
chosen may possess for carrying on the industry in question, i.e., the 
possibility of producing cheaper at this point than elsewhere, or being 
better able there to market the products. Very quickly, however, 
certain decided economic advantages emerge. Workmen, skilled in 
the specialty for which the center begins to be known, flock there and 
wait their chance *'to be taken on at one of the mills." In many 
cases an immigration of skilled labor from corresponding centers 
abroad sets in. East Liverpool, Ohio, was at one time chiefly an 
English town as the result of such immigration. A pool of specially 

' The opposition of the manufacturer or the manufacturers already established 
in the industry must, however, be counted on in many cases, especially if the 
products made are for sale in a comparatively limited market. As far as such 
opposition seems likely to develop, the advantage above described is counteracted, 
local investors becoming doubtful regarding the safety of their money under such 
circumstances. 



THE ORGANIZATION OF INDUSTRY 197 

skilled labor is thus formed which acts as a powerful inducement to 
the expansion of the industry from within, while at the same time it 
draws prospective manufacturers to this center from without. 

The use of machinery has, however, tended to lessen the impor- 
tance of a specially skilled labor supply. In proportion as an industry 
becomes automatic, its localization becomes independent of its supply 
of special labor. It is interesting to note in this connection that six of 
the fifteen industries selected for study on account of their marked 
localization are industries in which handwork constituted for many 
years the most important part of the operations. In some instances, 
such as the glove, collar, and hat manufacturing, handwork is still 
an important factor, while in the manufacture of boots and shoes 
handwork persisted to a large extent as late as 1870. 

In a specialized community of this sort the contact of workmen 
and employers with each other results in a mutual improvement in 
manufacturing methods. Laborers "talk shop" more or less when 
not at work, and the devices adopted in one establishment for making 
the work easier are soon adopted in all. Similarly, it is easy for a 
manufacturer in such a place to note the experiments with patented 
improvements carried on in another establishment, and to adopt such 
improvements just as soon as their value is demonstrated, by paying 
the royalty demanded. 

In the course of time another advantage arises in such a specialized 
center — the possibility of subdividing the processes of manufacture 
among several establishments— a division of labor among employers. 
In the Massachusetts shoe cities, for example, there are establish- 
ments which make only uppers, and others which make only "findings" 
(counters, shanks, heel stiff eners, etc.). Soon, also, subsidiary indus- 
tries spring up for the supply of the special machinery and tools 
required. As a result, new and up-to-date tools and machinery may 
be had in such centers with the least possible delay, and existing 
machinery may be kept continually in repair. 

Thus a town's specialization increases its supply of specialized 
labor and specialized machinery. These, in turn, react to increase 
the specialization of the town. Success breeds success in an almost 
geometrical ratio. Cause and effect propel each other in a continually 
expanding circle, the self-created local advantages becoming in time 
so powerful that they entirely neutralize the greater general advan- 
tages of location which other localities may have come to possess. 



198 MATERIALS FOR ELEMENTARY ECONOMICS 

56. THE DIVISION OF LABOR IN PIN-MAKING^ 

To take an example, therefore, from a very trifling manufacture, 
but one in which the division of labor has been very often taken 
notice of, the trade of the pin-maker; a workman not educated to 
this business (which the division of labor has rendered a distinct 
trade), nor acquainted with the use of the machinery employed in it 
(to the invention of which the same division of labor has probably 
given occasion), could scarce, perhaps, with his utmost industry, 
make one pin in a day, and certainly could not make twenty. But 
in the way in which this business is now carried on, not only the 
whole work is a peculiar trade, but it is divided into a number of 
branches of which the greater part are likewise peculiar trades. One 
man draws out the wire, another straights it, a third cuts it, a fourth 
points it, a fifth grinds it at the top for receiving the head; to make 
the head requires two or three distinct operations; to put it on is 
a peculiar business, to whiten the pins is another; it is even a trade 
by itself to put them into the paper; and the important business of 
making a pin is, in this manner, divided into about eighteen distinct 
operations, which, in some manufactories, are all performed by dis- 
tinct hands, though in others the same man will sometimes perform 
two or three of them. I have seen a small manufactory of this kind 
where ten men only were employed, and where some of them conse- 
quently performed two or three distinct operations. But though 
they were very poor, and therefore but indifferently accommodated 
with the necessary machinery, they could, when they exerted them- 
selves, make among them about twelve pounds of pins in a day. 
There are in a pound upward of four thousand pins of a middling 
size. Those ten persons, therefore, could make among them upward 
of forty-eight thousand pins in a day. Each person, therefore, 
making a tenth part of forty-eight thousand pins, might be considered 
as making four thousand eight hundred pins in a day. But if they 
had all wrought separately and independently, and without any of 
them having been educated to this pecuHar business, they certainly 
could not each of them have made twenty, perhaps not one pin in a 
day; that is, certainly, not the two hundred and fortieth, perhaps 
not the four thousand eight hundredth part of what they are at 
present capable of performing, in consequence of a proper division 
and combination of their different operations. 

I From Adam Smith, The Wealth of Nations, Book I, chap. i. 
[For a description of modern machine methods in pin-making see Selection 
42. — Editors.] 



THE ORGANIZATION OF INDUSTRY 199 

57. DIVISION OF LABOR IN MEAT PACKING' 

Notwithstanding the high skill required, the proportion of skilled 
workmen in the butchers' gang is very small, owing to a minute 
division of labor. It would be difficult to find another industry where 
division of labor has been so ingeniously and microscopically worked 
out. The animal has been surveyed and laid off like a map ; and the 
men have been classified in over thirty specialties and twenty rates of 
pay, from 16 cents to 50 cents an hour. The 50-cent man is restricted 
to using the knife on the most delicate parts of the hide (floorman) 
or to using the axe in splitting the backbone (splitter) ; and, wherever 
a less skilled man can be slipped in at 18 cents, i8| cents, 20 cents, 21 
cents, 22I cents, 24 cents, 25 cents, and so on, a place is made for him, 
and an occupation mapped out. In working on the hide alone there 
are nine positions, at eight different rates of pay. A 20-cent man 
pulls off the tail, a 2 2|-cent man pounds off another part where the 
hide separates readily, and the knife of the 40-cent man cuts a different 
texture and has a different "feel" from that of the 50-cent man. 
Skill has become specialized to fit the anatomy. 

In this way, in a gang of 230 men, killing 105 cattle an hour, there 
are but 11 men paid 50 cents an hour, 3 men paid 45 cents, while the 
number getting 20 cents and over is 86, and the number getting under 
20 cents is 144, as follows: 

Typical Crew of Cattle Butchers and Helpers 

Rate of pay per hour No. of men at rate 

50 cents II 

45 " 3 

40 " S 

32I " 6 

31^ " 2 

30 " 2 

27i " 4 

26i " 6 

25 " 6 

24 " I 

22i " 16 

21 " 4 

20 " 20 

18^ " 5 

15 to 18 cents 139 

Average 21 Total 230 

'From John R. Commons, "Labor Conditions in Meat Packing and the 
Recent Strike," in The Quarterly Journal of Economics, XIX, 3-4. 



200 MATERIALS FOR ELEMENTARY ECONOMICS 

S8. DIVISION OF LABOR IN THE SHOE-MAKING INDUSTRY' 

In the cutting-room the parts which form the upper are cut out. 
For the best goods this is done with a hand knife. For the less expen- 
sive classes of leather, and for linings and gussets — which are usually 
cut from cloth — a die is used. The die-cutters are also called block- 
hands, dinkers, and clickers. A skiver works in the fitting- or stitching- 
room, and skives or cuts to a bevel in a skiving machine the edges of 
the pieces for the uppers. Cementers or pasters put cement on the 
skived surfaces which folders fold over and stick together by pressure 
either in a machine or by hand, thus producing a finished instead of 
a raw edge. Upper-stitchers include all workers on sewing-machines 
in the fitting-room, whether on leather or linings. An eyelet-row 
stitcher puts stitching on the quarter, just outside the place where 
the row of hooks and eyelets will be. A closer stitches or closes the 
quarters together at the back, and a seam-rubber or seam-pounder 
smooths this seam by rubbing or pressing it out as flat as possible on 
a machine. A gore- or gusset-stitcher stitches in gores or gussets such 
as appear in congress boots. A lining-stitcher, lining-maker, or liner 
sews together the different pieces of the lining, and a closer-on or 
in-seamer stitches the lining into the quarters. When the vamps 
are lined separately a vamp-liner does the work. On fine work a 
facing-stitcher binds the lining with a facing of leather. A beader 
operates a machine of the same name which presses together the 
seam made around the top of the quarters by closing on. A top- 
stitcher or corder runs stitching around the quarters just below this 
seam, through the quarter and lining. A buttonhole-machine operator 
puts the quarters for button shoes through her machine, which makes 
a cut, lays a heavy cord around the edge, and stitches over the cord 
and through the edge, making a buttonhole. The buttonhole-finisher's 
machine sews down that part of the heavy cord which passes from 
buttonhole to buttonhole. The buttons are sewed on by hand or by 
machine, or are fastened on with wire staples. A gang-punch operator 
punches the holes for eyelets in laced shoes. An eyeleter or fastener- 
setter sets in the eyelets with an eyeleting machine. A hooker puts in 
the hooks with a hooking machine. A marker or tip-marker marks on 
the vamp the place where the tip is to go, and a tipper or tip-stitcher 
stitches it on; sometimes a tip-paster pastes or gums the tips onto 

' Adapted from the U.S. Census Special Report on Employees and Wages 
(1903), pp. 1199-1201. 



THE ORGANIZATION OF INDUSTRY 201 

the vamps before they are stitched. A perforator perforates the edges, 
and a tip-fixer glues down or otherwise adjusts them. A vamp-closer 
stitches the two ends of the vamp together behind. A vamper sews 
together the quarters and vamps. A barrer or stayer stitches back 
and forth through the edges of the two quarters. A heel-stay stitcher 
and an eyelet-stay stitcher put on heel stays and eyelet stays, respec- 
tively, after the lining has been closed on. A fancy stitcher is employed 
on some work to do stitching, which serves merely as decoration. 
A foxing stitcher sews to the back of the vamp of some shoes a piece 
of leather called a foxing. On fine work, a tongue-binder binds the 
edges of the tongues with cloth or leather; the tongues are stitched 
into place by tongue- stitchers. A strap-maker makes leather straps 
for ladies' slippers, or straps by which shoes are pulled onto the foot. 
Table workers are unskilled operatives who do such work as gumming 
or pasting, tip marking, and sewing on buttons, by hand, at tables 
in the stitching-room. 

In the sole-leather room, the parts which are to form the bottom 
of the shoe are made. These parts are: outsoles, half soles, and 
inner soles; heels, composed of heel lifts and top lifts; and shanks. 
Each of these parts is cut by a cutter designated by the particular 
part he cuts, the work being done with dieing-out machines like 
those used in the cutting-room. The outsole-cutter takes a side of 
sole leather and cuts the best parts of it into outsoles; what cannot 
be used for these goes to the half-sole cutter, then in turn to the inner- 
sole, top-lift, and heel-lift cutters. Sole-cutters and top-lift cutters 
have to use good judgment in deciding what parts of a side of leather 
are fit for the different soles and for the top lifts. A stock-sorter 
selects the stock for the various orders, an occupation requiring skill 
acquired only by long experience. A rander makes the rand — a 
horseshoe-shaped piece of leather used to make the heel lit the curve 
of the shoe bottom. A splitter runs the soles through a splitting 
machine, which reduces them to a uniform thickness by splitting a 
thin slice from the flesh side. A rounder rounds them in a rounding 
machine. A channeler cuts a groove or channel in the outsoles and 
inner soles a short distance inside the edge. A stock-wetter or damper, 
by immersing the leather in water for a short time, brings it to the 
temper required for the successful cutting of the channel. The 
stitching of the soles is done through the floor of this channel, the leaf 
of leather made in cutting the channel having been turned back out 



202 > MATERIALS FOR ELEMENTARY ECONOMICS 

of the way of the needle by a channel-turner. A sole-skiver, working 
with a skiving or scarfing machine, skives the back edges of the half 
soles, which are to lie between the outsoles and the inner soles, so that 
they shall fit the angle where these come together. A feather-edger 
skives the shanks of the outer sole. Stock-fitter is a general term for 
an operative who does any of several operations in fitting the soles 
and heels. A half-sole fitter cements the half sole to the outsole. 
A sole-molder places the soles one at a time on the metal form of a 
molding machine, molding them into the shape required for the 
finished shoe. A roller passes the soles between heavy steel rollers, 
which compress and level them. A heel-maker or lacker assembles 
the several heel lifts, with the exception of the top lift, presses them 
together in a heel-building machine, and drives a few tacks through 
them. A heel-compressor molds them into shape in a powerful 
machine. In the poorer grades of shoes the heel is made of scrap 
leather and leather board or pulp. The composite material, called 
pancake, is made by an operative, usually a girl, called a pancake- 
maker. A counter-cutter cuts out on a machine the counters which 
keep the back of the vamp in place; a counter-skiver skives their 
edges, and a counter-molder with a powerful machine shapes them 
between steel forms. A shank-cutter cuts with a die that part of the 
shank which is composed of leather or leather board. 

The uppers and the several parts which form the bottoms are 
brought together in the making- or bottoming-room. A bottomer 
is any operative occupied with any of the operations in the bottom- 
ing of a shoe. A puller-over fastens an inner sole with one or two 
tacks to the bottom of a last. Then, taking an upper, he inserts 
the counter and box toe in their places under the lining and draws 
the upper over the last. A laster is a skilled man who, with the aid 
of a lasting machine, pulls the upper down over the inner sole evenly 
and firmly, and tacks it all the way around the sole. A shanker 
tacks the shank in place, cuts away the superfluous upper leather 
gathered under the toe, beats the edge of the upper out as flat as pos- 
sible wherever it is gathered, and draws out the tacks which hold 
the inner sole to the last. If a shoe is to be made by the Goodyear 
or welt system, a Goodyear welter or welt-sewer sews on a welt around 
the bottom of the shoe. A welt-butter butts or joins welts on Good- 
year and hand-sewed shoes. A joiner joins the ends of the welt 
when it is run around the heel. A sole-filler fills the space inclosed 
by the welt, which would form an air space if the outsole were put 



THE ORGANIZATION OF INDUSTRY 203 

on immediately, with a piece of tarred felt, or with a paste of ground 
cork and cement. A sole-layer or stacker lays the outsole in cement 
on the bottom of the shoe and firmly presses it in a machine. A 
Goodyear stitcher sews the outsole to the welt. A rough rounder 
operates a machine of the same name, which cuts down the outsole 
to the shape of the last. After the stitching a channel-cementer 
brushes cement into the channel. A leveler or beater-out then presses 
down the leaf of the channel by rubbing over it a piece of steel and, 
by pressing out or leveling the bottom in a machine, gives the sole 
the shape it is to take in the finished shoe. 

The shoe now has all its parts. The rest of the work in the 
making-room consists in trimming the edges of the soles and heels 
and preparing them for the finishing. For the sake of clearness, 
the operations on the soles will be considered consecutively, then 
those on the heels. An edger or edge-trimmer trims smooth the 
forepart edges or edges of the sole on a revolving cutter. A prick- 
stitcher brings into prominence the stitches on the surface of the 
projecting sole, using a small machine with which little grooves are 
impressed between the stitches. A heel-slugger drives into the heel 
a row of steel or brass nails. A heel-trimmer or shaver trims or shaves 
the curved edge of the heel. A heel-scourer sandpapers the heel, 
the sandpaper being attached to the circumference of a wheel. A 
heel-breaster cuts smooth the front of the heel with a knife driven 
by a foot lever. In the bottom-finishing room a bottom-sander, buffer, 
scourer, or cuffer sands, buffs, or scours the bottoms of the soles and 
heels with a revolving roll covered with sandpaper. Naumkeag- 
machine operators, with a Naumkeag machine, treat the shanks in 
the same way. Blackers include all who blacken, paint, or stain the 
top, edges, or bottom of shoes in the final processes. An edge-blacker, 
a boy, applies blacking or ink to the edges with a brush. An edge- 
setter sets the edges with a block of steel cut to fit the edge and heated 
by gas or by friction. A heel-blacker blacks the edge of the heel. 
A bottom- or shank-blacker or painter blackens or paints the soles, the 
bottoms of the heels, and the shanks. A burnisher, shank-burnisher, 
or shank-fakir burnishes the better class of blacked bottoms by rubbing 
them with a heated hand iron. A bottom-finisher polishes both painted 
and blacked surfaces with revolving, cloth-covered rolls and revolving 
brushes. On some shoes, bottom- gummers place a thin coat of gum 
solution before the last polishing, thus giving a smooth hard finish. 
Stamping-machine operators, impress a name, trade-mark, or design 



204 ' MATERIALS FOR ELEMENTARY ECONOMICS 

of some kind on the soles of many shoes. A wheeler runs a small 
cogged wheel around the upper edge of the heels of most shoes and 
the soles of many, thus leaving the imprint of its cogs. 

In the upper-finishing and packing-room a treer puts the shoe 
on a horizontal form and applies a paste dressing to the upper, 
rubbing it in thoroughly with a stick. A dresser, brusher, or polisher 
dresses and polishes the shoes with revolving power brushes. A 
cleaner cleans the kid uppers of men's and women's fine shoes with 
water on the revolving brush, and then nearly all are ironed while 
on a tree by an ironer who rubs a hot iron over them, in order to make 
them stand up and give them form. All these operatives are col- 
lectively cdlled finishers. A sock-liner puts in the sock and heel linings, 
which are pieces of thin leather or cloth gummed to the inside of the 
shoe bottom. A stringer or lacer laces the shoes, or a huttoner buttons 
them. Inspectors look over the finished shoes, and wrappers wrap 
them in paper and place them in paper boxes or cartons. Labelers 
paste on the carton labels, packers put the goods in cases, and they 
are shipped by shippers. A bench-hand is a hand sewer at a bench, 
or one who does any hand mending or repairing that is necessary. 
In this category are cobblers, toe-repairers, hand heel-shavers, etc. 



B. MANAGEMENT 
59. THE PROBLEM OF THE BUSINESS MAN 

The statement that the great majority of business enterprises 
result in failure is sufficiently startling, but it is not a statement 
which is likely to be questioned by anyone who really appreciates 
the complexity of the problem of the business man. One way of 
stating that problem is to say that all business consists of two ele- 
ments: production of goods and marketing of goods. This descrip- 
tive classification in itself conveys a considerable idea of complexity 
to anyone who has seen any of the modern literature on Scientific 
Management, or who has seen a portion of the material on scientific 
methods of distribution. There is, however, an analytical method 
of stating the business man's task which serves to bring out more 
clearly its complexities. The problem may be regarded as primarily 
the mechanical problem of combining labor, capital, natural resources, 
and directive skill in advantageous proportions. But this primary 
problem is indefinitely complicated by the fact that the advantageous 
proportions of labor, capital, etc., are constantly changing and inde- 



THE ORGANIZATION OF INDUSTRY 205 

terminate as a result of the operation of the laws of price and in 
consequence of progressive methods. 

The mechanical problem alone is exceedingly complex, as is suffi- 
ciently implied by a mere statement of the law of diminishing returns 
in its universal application. If a business man were told, "Take any 
grade or grades of land in any quantity you choose, take any grade or 
grades of labor in any quantity you choose, take any of the present 
forms of capital in any quantity you choose, and set up an organization 
which will be of maximum efficiency," his problem would be formid- 
able although in attacking it he could secure expert guidance from the 
mechanical engineer, for after all, this arrangement of the productive 
factors is primarily a matter of mechanics. Yet however intricate 
the original mechanical problem may be, it suggests but the beginning 
of the complications in which the business man finds himself. He is 
not able to take any grade of land in any quantity he chooses; he may 
not select any grade of labor in any quantity he chooses; he may not 
utilize any existing form of capital in any quantity he chooses, but 
in every case, the element of price enters, and he is forced to ask him- 
self such questions as these: "Will this grade of land for which I must 
pay X dollars be better for me than that grade of land for which I 
must pay y dollars? Shall I use this grade of labor at this given 
price, or would it be better for me to use another grade of labor at a 
different price ? Shall I use this particular machine at this price, or 
shall I use one of the other scores of machines which will be furnished 
me at different prices?" And after he has reached some solution to 
these questions, he learns that price is again the significant consid- 
eration when he comes to disposing of his product. In all of these 
price intricacies, the business man is pretty much the victim of circum- 
stances. Unless he has monopoly power, he has as an individual very 
little to say concerning the price at which he may secure any factor 
of production; and still less to say concerning the price at which he 
may dispose of his product. 

Still further complicating the business man's intricate mechanical 
problem, shot through and through as it is with the variable factor 
of price, we must recognize another variable: the influence of progress 
in industrial or commercial methods. Changes in methods may 
influence and very likely will influence practically all of the other 
variables in the problem. They may be changes which the business 
man has brought about from an intensive study of his own business. 
They may be changes which are forced upon him by inventions of 
new equipment. They may be changes forced upon him by some 



2o6 MATERIALS FOR ELEMENTARY ECONOMICS 

revolution in the methods of production or of marketing his goods. 
The chances are that here also he will be the victim of circumstances. 
He will as an individual have little influence in determining the course 
of events, but the slightest misjudgment of the actual course of events 
means for his business only one possible outcome : failure. 

60. PROBLEMS OF FARM MANAGEMENT' 

b'I 

J? O 



M S fll ■*-* W M^JQ 

— o-r c MTj ,„ 2 u ;= ^ ^ u 



1^ ^^^I§3K1 



- -^ - -^ ill! II =3 o ^:gls 



^o -v a ^ Ji a 
j'-^'^. ra .a o ^ a a ■ . ■ pSSf" £? ^ 8& 



=S <Wc« 



,axi 



■ - - -« - ^ o o 

;3Sm al sa >> ° 






o a 




Esa 



Is 

B < 

' From T. N. Carver, Principles of Rural Economics, p. 223. Ginn & Co. 
1911. 



THE ORGANIZATION OF INDUSTRY 207 

61. THE PRINCIPLES OF BUSINESS ORGANIZATION^ 

In defining business organization, we must not take for our unit 
of measurement a complete modern corporate institution. We must 
go back of this to the two fundamental elements governing all business 
transactions between members of the human race. These two 
elements we can class simply as "producing" and "selling." Any 
individual or any body of individuals doing either one or both of these 
things becomes a business organization. Joining together these 
two primal elements there is a third element which becomes a most 
important factor in any business. This can be described under the 
title of " accounting " or " reckoning." When a farmer raises a bushel 
of turnips, takes them to market, sells them and records the trans- 
action in the back of the family almanac, he has performed all the 
functions of a business organization. 

HOW CONTROL IS VESTED AND EXERCISED IN BUSINESS 

Turning now from the analysis of the functions of a business to 
an examination of its sources of authority, we find a variety of methods 
in which control may be exercised. In every organization there is an 
ownership element which constitutes its primal authority and control. 
Fundamentally, the form of this ownership is of no material impor- 
tance, whether it is vested in an individual, in a partnership or in a cor- 
poration of stockholders. The essential fact is that this ownership 
constitutes the fountain head of all business organization, and sub- 
ordinate to this authority, however it may be vested, are ranged the 
three departments of production, accounting and selling, by which the 
purposes of the owning power are put into effect. The form of any 
business organization so far as developed up to this point can be 
illustrated in a simple diagram such as shown in Form i, on p. 208. 

Such an organization is characteristic and complete. It applies 
to any business enterprise, whether the yearly volume of business is 
numbered in three or eight figures. The corner groceryman who 
constitutes his own business organization performs all the functions 
of the great department store. He becomes the "production" 
division when he buys his goods from the wholesaler and prepares 
them for the shelves. He becomes the "sales" division when he 
writes a price card to put in the window and sells some of the goods to 
a customer over the counter, and he becomes the "accounting'' 
division when he goes to his desk and makes an entry of the sales in 

'Adapted from Business Admiuislralion, pp. 13-29. The System Co., 1909. 



2o8 



MATERIALS FOR ELEMENTARY ECONOMICS 



his order or cash book. At the same time he is exercising these offices 
by power of the appointment received at his own hands as owner. 

When ownership is vested in one individual, the matter of control 
and authority is of the simplest form. The owner may have a 
factory manager, an office manager and a sales manager, but all 
three divisions are under his absolute control and dictation. It is 
possible that the individual owner may arrange his organization so 
that he need not give it his actual personal supervision and yet retain 




















1 




II 




III 


PRODUCTION 
OR SOURCE OF 

SUPPLY by: 




ACCOUNTING OR 

OFFICE division:. 




selling: 
direct and 


1. ORrGINAL 




INCLUDING ALL 




INDIRECT MEANS 


PRODUCTION 




RECORDS AND 




OF BRINGING 
PRODUCT TO PUBLIC 


2. MANUFACTURE, OR 




SYSTEMS EMPLOYED 




NOTICE AND PLACING 


3. PURCHASE FROM 




IN CONDUCTING 




IT IN THE HANDS 


OTHER PRODUCERS 




THE BUSINESS 




OF THE CONSUMER 



Form i, — ^The factors fundamental in any business are here represented. 
Producing, accounting, and selling are the three indispensable mercantile 
activities, over which control is exercised by some form of ownership. 

a cohesive and co-operative administration. This can be done by 
forming an executive committee made up of his division managers, 
who, while retaining their respective positions in the organization, 
will be bound by united action of the committee on all important 
matters of business policy, the owner delegating his control to such a 
committee under general instructions. 



HOW A PARTNERSHIP IS FORMED 



In a partnership, two or more individuals are bound into one 
controlling factor by a certain partnership agreement. This agree- 



THE ORGANIZATION OF INDUSTRY 



209 



ment is in legal form and should be of the most exact, detailed and 
binding character to avoid any misunderstandings, or complications. 
This legal partnership becomes in reality the controlling ownership 
in itself and the members of the firm are circumscribed by its pro- 
visions. The partnership agreement defines the shares that each 
member of the firm shall have in the conduct of the business, his 
duties, the voice that he shall have in deciding any matters of policy. 
It determines the division of profits, the proportionate assessment 
for losses, and the manner and methods by which the business shall 



A. C. JONES 



E. B. SMITH 



D. F. BROWN 




FORM BY PARTNERSHIP 

AGREEMENT, FIRM OF 
JONES, SMITH 4, BROWN 



JONES, MGR. 

PRODUCTION 

DIVISION 



SMITH, MGR. 

OFFICE 

DIVISION 



BROWN, MGR. 
SELLING 
DIVISION 



Form 2. — This chart and the two which follow represent three common 
methods of business control exercised through a partnership. In this case, three 
partners put their capital together and manage their own business, each member 
of the firm taking charge of one department. 

be conducted. The agreement may also provide for a receivership 
or sale of the respective interests in case of vital disagreement among 
the partners. In the matter of determining the control of the busi- 
ness, the partnership agreement may provide for a division of duties 
and of authority among the various partners (Form 2), or delegate 
the entire management to one of the partners (Form 3), or all the 
members of the firm may form an executive committee under 
whose general control and authority the division managers carry on 
the business (Form 4). It is frequently the case that some member 
of the firm is a "silent partner," known to the world only under the 
title "and Company." 



2IO 



MATERIALS FOR ELEMENTARY ECONOMICS 















JONES, SMITH & BROWN 

BOUND BY PARTNERSHIP AGREEMENT 

DELEGATE MANAGEMENT TO 


















BROWN 
GENERAL MANAGER 






































PRODUCTION MGR 




OFFICE MGR. 




SALES MGR. 



















Form 3. — In this partnership arrangement, two members of the firm are not 
actively engaged in the business. By a general agreement, the third member is 
placed in entire charge, with authority to appoint his assistants, at the head of 
the three branches of the work. 





JONES, SMITH & CO. 

BY PARTNERSHIP AGREEMENT 

COMPOSE THE 


















EXECUTIVE COMMITTEE 
WHICH APPOINTS 




























PRODUCTION MGR 




OFFICE MGR. 




SALES MGR. 



Form 4. — In this partnership scheme, one or more silent partners are repre- 
sented by the word "Company." The members of the firm here exercise general 
appointing power and oversight, while delegating everyday xontrol to their chosen 
managers. 



THE ORGANIZATION OF INDUSTRY 21 1 

In Form 4 it will be noted that the managers of the producing, 
accounting and selling divisions are given the actual working or opera- 
tive authority over the business, under guidance of a committee made 
up of the partners of the firm. 

Owing to the various advantages of a corporation, such a form of 
ownership is best adapted to modern business conditions. Such 
ownership also permits a more systematic and cohesive organization 
and more successful co-operation of the working parts because of the 
definiteness of its control and its accurate and fairly defined limits of 
authority. 

In a corporate organization, ownership is vested in the stock- 
holders of record, and these stockholders are bound by the stock 
subscription list, the articles of incorporation and the constitution and 
by-laws. These documents provide for the election of a board of 
directors, an executive committee and various officers, to whom the 
administration of business is thus delegated by vote of the stock- 
holders. Form 5 shows the analysis of a corporate organization. 

FORMATION OF AN INCORPORATED STOCK COMPANY 

The process of forming an incorporated stock company is some- 
what complex and varies in different states. The general plan, how- 
ever, is based on a stock subscription list to which those who wish to 
become stockholders attach their signatures, specifying the number 
of shares for which they subscribe. Heading this subscription list 
is the form agreement stating the purposes of the organization, its 
name, the amount of capital stock, and the par value of each share. 
After the required amount of capital has been subscribed, a stock- 
holders' meeting is held, at which a constitution and by-laws are 
adopted and directors are elected who subsequently choose the officers. 
The amounts subscribed having been paid in, in whole or in part, the 
state charter of incorporation may then be obtained and the company 
may commence business. 

The board of directors may arrange the further details of organiza- 
tion as it sees fit, but it frequently transfers its authority largely to 
the president, who may become the general manager. Or any 
director or an outside individual may be appointed by the directors 
as general manager and given full authority, subject to the board. 
The board may elect an executive committee to which its authority 
is delegated, and in some cases another committee is chosen as an 
advisory committee, at the head of which stands the general manager. 



212 



MATERIALS FOR ELEMENTARY ECONOMICS 



This advisory committee, in most large institutions, is made up of the 
general manager, who is closely connected with the operation of the fac- 
tory and the organization of the office; the treasurer, who is interested 



STOCKHOLDERS 

BOUND BY ARTICLES OF INCORPORATION 
CONSTITUTION AND BY-LAWS 



BOARD OF DIRECTORS 



EXECUTIVE COMMITTEE 



PRESIDENT 



GENERAL MANAGER 

(APPOINTED OR ELECTED) 



OFFICE MGR. 
OR BUSINESS MGR. 



PRODUCTION MGR. 
OR FACTORY SUPT. 



SALES MGR. 



Form 5. — ^The usual organization plan for a corporation is here represented. 
A nice adjustment of authorities to duties results from the several centers of 
control, each with a definitely limited power. 

in the financial work; the legal advisor; and in many instances some 
officers of the banking house through which the institution conducts its 



THE ORGANIZATION OF INDUSTRY 



213 



financial work. This advisory committee is able to meet successfully 
the difficulties of administration which come up from time to time. 

But although authority is passed from stockholders to directors, 
from directors to an executive committee, and again to an advisory 
committee, there must be some positive limitation that will prevent 
any of these bodies violating the general policy of the institution. 
For example, one of the largest organizations in the country places a 
limit of $10,000 upon the expenditures which can be made by the 
advisory committee. Any expenditure under this amount could not 
seriously affect the policy or the finances of the company. If an 



STOCKHOLDERS 



DIRECTORS 



CONTROLLER 




PRESIDENT 



GENERAL MANAGER 



OFFICE MANAGER 




SALES MANAGER 



»Tn 102 z Ci n X * :o »a 

H' : fs H ?i ? s ^ 5; s 3" 11 ^ I 

nd £ °s "S -s ? 8 ; 15 ; H=^ ss » j 

?5l s 3^ r ?' ? i " ; ? ra 's s s 



Form 6. — In this chart are shown the same elements of corporate control as 
in Form 5. Here, however, are added the many smaller factors that are more or 
less necessary in any business, arranged according to their duties and the authority 
to which each is subordinated. 



expenditure between $10,000 and $25,000 is to be made, it must 
first be approved by the executive committee, and if an expenditure 
of more than $25,000 is deemed necessary, it must be passed upon by 
the board of directors. It is impracticable for any unimportant 
details of such a business as this to pass beyond the general manager 
or the advisory committee, but the financial limit which has been 
placed upon their actions makes it impossible for any step of a serious 
nature to be taken unless it has the approval of the executive commit- 
tee, or, in the most vital matters, of the directors themselves. Thus 



214 



MATERIALS FOR ELEMENTARY ECONOMICS 




THE ORGANIZATION OF INDUSTRY 



215 




2i6 MATERIALS FOR ELEMENTARY ECONOMICS 

details are decided by the lower officials and only questions of general 
policy reach higher. 

ALL BUSINESS ORGANIZATIONS BASED ON ONE PRINCIPLE 

The details of the business organization following ownership con- 
trol are practically the same, whatever form that ownership takes. 
No matter how complicated an organization may appear, when 
properly analyzed it can always be reduced to the rudimentary form 
shown in the diagram: that is to say, ownership concentrating its 
power of control into a central authority, known as the general 
manager, whence such power is administered through the medium 
of three executives over the main divisions of the organization, thus 
carrying out the three functions of the business: production, account- 
ing and selling. 

The special organization of these three divisions varies according 
to the nature of the business, its size and the perfection of the system 
to which its operation has been reduced. The complete function of 
each division which will be performed through the different depart- 
ments of work may be so closely involved as to make their separation 
not easily distinguishable. Frequently a general manager is his own 
production manager, sales manager and chief accountant combined, 
and when acting as such performs all the duties of the minor execu- 
tives of each division. It is also true that the heads of divisions or 
departments are sometimes so named as to make their real position 
in the organization seem uncertain. For example, an official may 
hold the title of "business manager" and have charge of both the 
accounting and sales divisions, when, in fact, his proper title is that 
of assistant general manager, as he simply represents the executive 
in his detail work. 

THE AUDITOR AN OFFICAL OF PECULIAR INDEPENDENCE 

It will be noticed that the office of auditor is (see Form 6) 
subordinate only to the board of directors. The position of auditor 
may be filled in either one of two ways. There are at present large 
auditing companies which from tirtie to time go over the work of an 
entire business organization in order to prove the accuracy of the 
work in each department. The position of auditor on this chart, 
however, means that there is a certain official retained by the execu- 
tive committee as an active member of the organization. The 
work which the auditor performs in an organization of this kind 



THE ORGANIZATION OF INDUSTRY 



217 



is usually of a statistical and reportorial nature, such as drawing up 
comparative tables of the work done, particularly that of the account- 
ing department. For this reason he is not put under the general 
manager nor under the secretary or treasurer, who may be interested 
in the conduct of the work, but keeps an independent position and is 
responsible only to the executive committee. Only in this way can 
he be so independent that he can criticize either favorably or unfavor- 
ably the work that has been done. He must be able to act without 
fear or bias, and bring before the executive committee the exact 
details of the business which they need most to know. They have 



eOOKKCCPER 



eooKKcOEn 



~604itKl 



'HCMMCCH — 



y 


y^v 


^-^.^ 


>' 




CREDIT N 


CONTROLLER 


r 1 ^ 

CORRESPONDCNCe 


MANAGER 


•^ ^ 


DEPARTMENT 


A^ 


^;*? 


I 


\. ' 


y^\^ 


3t 


,''X. 



.CUSTOMER 



RECEIVING 
CLERK ' 



S^P^ING 
CLERK 



STOCKKEEPER^ 



Form 8. — A single department, that of accounting, is here analyzed. The 
line at the left represents material purchased from the producer. The bill 
for this purchase goes to the records; the material passes to the stock room to be 
met by orders from customers and shipped in satisfaction of these sales. 

given up their authority, but at the same time they must know that 
the trust they have imposed is carried out. 



THE FUNCTIONS OF THE CONTROLLER 

Another important official whose duties demand that he be inde- 
pendent of the department heads is the controller. Sometimes the 
work of this official and of the auditor are performed by the same 
man, but the functions should be discriminately named if not sepa- 
rated in fact. The controller is, as his title suggests, the safety 
check on a business. He has absolute control over disbursements 



2i8 MATERIALS FOR ELEMENTARY ECONOMICS 

and all purchase orders are submitted to him before leaving the office. 
He also may check the work of the plant superintendent if he thinks 
that production is being carried on too rapidly for economy. His 
power of limitation extends also to the credit manager, whose deci- 
sions on the extending of credit he may review and reverse. He is 
accountable only to the board of directors from whom he receives his 
authority. 

In a stock corporation, as earlier stated, the officers play an 
inconspicuous part in the actual operation of the business, and yet, 
by special act of the directors or by authority of the by-laws, they 
may become active elements of the working organization. The 
president, by virtue of his position, is at the same time chairman 
of the executive committee. Working along with him, with authority 
received from the same source, are the vice-president, the treasurer, 
and the secretary. 

The vice-president ordinarily has no other duties than to take 
the place of the president in case of the latter's inability to perform 
his usual work. However, in many modern organizations, in order 
that the vice-president may be more closely associated with the 
organization and because, in many instances, he is financially inter- 
ested to a large extent, he also acts as general manager, sales manager, 
or in some equally responsible position. 

The secretary and treasurer may have charge of different depart- 
ments of the office work. Where these offices are held by different 
men, the secretary may have charge of the general stenographic and 
office work, and the treasurer may have oversight of the accounting 
functions which are closest connected with the finances of the organi- 
zation. Officers of the company are frequently appointed to execu- 
tive positions and retain their corporation titles, while in reality those 
titles should be used only in their connection with the stock corpora- 
tion itself. For example, the treasurer of a corporation might be 
appointed to or given the position of a controller, and his work in the 
latter capacity might be done under the title of treasurer but in 
reality he is simply controller while he occupies the controller's desk. 
In large corporations, however, the secretary and treasurer, instead 
of directing any department, will be busied with the more important 
statistical and financial conduct of the company. 



THE ORGANIZATION OF INDUSTRY 219 

62. SCIENTIFIC MANAGEMENT' 

I. THE FUNCTION OF SCIENTIFIC MANAGEMENT 

In the past the prevailing idea has been well expressed in the saying 
that "Captains of industry are born, not made"; and the theory 
has been that if one could get the right man, methods could be safely 
left to him. In the future it will be appreciated that our leaders 
must be trained right as well as born right, and that no great man 
can (with the old system of personal management) hope to compete 
with a number of ordinary men who have been properly organized 
so as efficiently to co-operate. 

This paper has been written: 

First. To point out, through a series of simple illustrations, the 
great loss which the whole country is sufifering through inefficiency in 
almost all of our daily acts. 

Second. To try to convince the reader that the remedy for this 
inefficiency lies in systematic management, rather than in searching 
for some unusual or extraordinary man. 

Third. To prove that the best management is a true science, 
resting upon clearly defined laws, rules, and principles, as a founda- 
tion. And further to show that the fundamental principles of 
scientific management are applicable to all kinds of human activities, 
from our simplest individual acts to the work of our great corporations, 
which call for the most elaborate co-operation. And, briefly, through 
a series of illustrations, to convince the reader that whenever these 
principles are correctly applied, results must follow which are truly 
astounding. 

Under the old type of management success depends almost entirely 
upon getting the "initiative" of the workmen, and it is indeed a rare 
case in which this initiative is really attained. Under scientific 
management the "initiative" of the workmen (that is, their hard 
work, their good-will, and their ingenuity) is obtained with absolute 
uniformity and to a greater extent than is possible under the old 
system ; and in addition to this improvement on the part of the men, 
the managers assume new burdens, new duties, and responsibilities 
never dreamed of in the past. The managers assume, for instance, 
the burden of gathering together all of the traditional knowledge 
which in the past has been possessed by the workmen and then of 
classifying, tabulating, and reducing this knowledge to rules, laws, 

' Adapted from F. W. Taylor, The Principles of Scientific Management, passim. 
Harper & Brothers, 1913. (Copyright, 191 1, by Frederick W. Taylor.) 



220 MATERIALS FOR ELEMENTARY ECONOMICS 

and formulae which are immensely helpful to the workmen in doing 
their daily work. In addition to developing a science in this way, 
the management take on three other types of duties which involve 
new and heavy burdens for themselves. 

These new duties are grouped under four heads: 

First. They develop a science for each element of a man's work, 
which replaces the old rule-of-thumb method. 

Second. They scientifically select and then train, teach, and 
develop the workman, whereas in the past he chose his own work and 
trained himself as best he could. 

Third. They heartily co-operate with the men so as to insure all 
of the work being done in accordance with the principles of the 
science which has been developed. 

Fourth. There is almost equal division of the work and the respon- 
sibility between the management and the workmen. The manage- 
ment take over all work for which they are better fitted than the 
workmen, while in the past almost all of the work and the greater 
part of the responsibility were thrown upon the men. 

II. SOME OF THE PRINCIPLES OP SCIENTIFIC MANAGEMENT EXPLAINED 

[The author presents many cases of scientific study of industrial 
methods; for example, "time studies" of the movements required 
by a workman in doing each part of his work, scientific study of 
the proper types of implements to be used, investigations of the 
tiring effect of heavy labor upon a first-class man, to determine the 
"law" governing the proportion of the day during which the laborer 
may wisely be "under load" and the "law" governing the frequency 
and length of periods of rest, etc. Even the method of wage payment, 
it is argued, is governed by "laws" discovered through inypstigation 
of the motives which influence men. — Editors.] 

Perhaps the most important law belonging to this class, in its 
relation to scientific management, is the effect which the task idea 
has upon the efficiency of the workman. This, in fact, has become 
such an important element of the mechanism of scientific management, 
that by a great number of people scientific management has come 
to be known as "task management." .... The average work- 
man will work with the greatest satisfaction, both to himself and to 
his employer, when he is given each day a definite task which he is 
to perform in a given time, and which constitutes a proper day's 
work for a good workman. This furnishes the workman with a 



THE ORGANIZATION OF INDUSTRY 221 

clear-cut standard, by which he can throughout the day measure his 
own progress, and the accomplishment of which affords him the 
greatest satisfaction. 

The writer has described in other papers a series of experiments 
made upon workmen, which have resulted in demonstrating the fact 
that it is impossible, through any long period of time, to get workmen 
to work much harder than the average men around them, unless they 
are assured a large and a permanent increase in their pay. This 
series of experiments, however, also proved that plenty of workmen 
can be found who are willing to work at their best speed, provided 
they are given this liberal increase in wages. The workman must, 
however, be fully assured that this increase beyond the average is to 
be permanent. Our experiments have shown that the exact percent- 
age of increase required to make a workman work at his highest 
speed depends upon the kind of work which the man is doing. 

These two elements, the task and the bonus (which, as has been 
pointed out in previous papers, can be applied in several ways), 
constitute two of the most important elements of the mechanism of 
scientific management. They are especially important from the fact 
that they are, as it were, a climax, demanding before they can be used 
almost all of the other elements of the mechanism; such as a planning 
department, accurate time study, standardization of methods and 
implements, a routing system, the training of functional foremen or 
teachers, and in many cases instruction cards, slide-rules, etc. 

The necessity for systematically teaching workmen how to work 
to the best advantage has been referred to. It seems desirable, there- 
fore, to explain in rather more detail how this teaching is done. In 
the case of a machine shop which is managed under the modern 
system, detailed written instructions as to the best way of doing each 
piece of work are prepared in advance, by men in the planning depart- 
ment. These instructions represent the combined work of several 
men in the planning-room, each of whom has his own specialty or 
function. One of them, for instance, is a specialist on the proper 
speeds and cutting tools to be used. He uses specially prepared slide- 
rules as an aid, to guide him in obtaining proper speeds, etc. Another 
man analyzes the best and quickest motions to be made by the work- 
man in setting the work up in the machine and removing it, etc. 
Still a third, through the time-study records which have been accumu- 
lated, makes out a time-table giving the proper speed for doing each 
element of the work. The directions of all of these men, however, 



222 MATERIALS FOR ELEMENTARY ECONOMICS 

are written on a single instruction card or sheet. Human nature 
is such, however, that many of the workmen, if left to themselves, 
would pay but little attention to their written instructions. It is 
necessary, therefore, to provide teachers (called functional foremen) 
to see that the workmen both understand and carry out these written 
instructions. 

Under functional management, the old-fashioned single foreman 
is superseded by eight different men, each of whom has his own special 

Diagram Illustrating the Routes of Authority Under the Traditional 
OR Military Type or Management' 




i i i i i i i 

mnrm 



duties, and these men, acting as the agents for the planning depart- 
ment, are the expert teachers, who are at all times in the shop helping 
and directing the workmen. Being each one chosen for his knowledge 
and personal skill in his specialty, they are able not only to tell the 
workman what he should do, but in case of necessity they do the 
work themselves in the presence of the workman, so as to show him 
not only the best but also the quickest methods. 

One of these teachers (called the inspector) sees to it that he 
understands the drawings and instructions for doing the work. He 

'This diagram is taken from Frank B. Gilbreth, "Units, Methods, and 
Devices of Measurement under Scientific Management," in The Journal of Political 
Economy, XXI, 619 (July, 1913). 



THE ORGANIZATION OF INDUSTRY 



223 



teaches him how to do work of the right quality; how to make it fine 
and exact where it should be fine, and rough and quick where accuracy 
is not required — the one being just as important for success as the 
other. The second teacher (the gang boss) shows him how to set up 
the job in his machine, and teaches him to make all of his personal 
motions in the quickest and best way. The third (the speed boss) 
sees that the machine is run at the best speed and that the proper 

Diagram Illustrating the Principle of Functional or Scientific 
Management' 



PLANNING 




PERFORMING 



tool is used in the particular way which will enable the machine to 
finish its product in the shortest possible time. In addition to the 
assistance given by these teachers, the workman receives orders and 
help from four other men: from the "repair boss" as to the adjust- 
ment, cleanliness, and general care of his machine, belting, etc.; 
from the "time clerk," as to everything relating to his pay and to 
proper written reports and returns; from the "route clerk," as to 

•This diagram is taken from Frank B. Gilbreth, "Units, Methods, and 
Devices of Measurement under Scientific Management," in The Journal of Political 
Economy, XXI, 619 (July, 1913). 



224 MATERIALS FOR ELEMENTARY ECONOMICS 

the order in which he does his work and as to the movement of the 
work from one part of the shop to another; and, in case a workman 
gets into any trouble with any of his various bosses, the "discipli- 
narian" interviews him. 

The history of the development of scientific management up to 
date, however, calls for a word of warning. The mechanism of 
management must not be mistaken for its essence, or underlying 
philosophy. As elements of this mechanism may be cited: 

Time study, with the implements and methods for properly 
making it. 

Functional or divided foremanship and its superiority to the old- 
fashioned single foreman. 

The standardization of all tools and implements used in the 
trades, and also of the acts or movements of workmen for each class 
of work. 

The desirability of a planning-room or department. 

The "exception principle" in management. 

The use of slide-rules and similar time-saving implements. 

Instruction cards for the workman. 

The task idea in management, accompanied by a large bonus 
for the successful performance of the task. 

The "differential rate." 

Mnemonic systems for classifying manufactured products as well 
as implements used in manufacturing. 

A routing system. 

Modern cost system, etc., etc. 

These are, however, merely the elements or details of the mechan- 
ism of management. Scientific management, in its essence, consists 
of a certain philosophy, which results, as before stated, in a combina- 
tion of the four great underlying principles of management: first. The 
development of a true science; second. The scientific selection of the 
workman; third. His scientific education and development; fourth. 
Intimate friendly co-operation between the management and the men. 

III. SOME ILLUSTRATIONS OF THE APPLICATION OF THE PRINCIPLES 
OF SCIENTIFIC MANAGEMENT 

A number of years ago a company employing about three hundred 
men, which had been manufacturing the same machine for from ten 
to fifteen years, sent for us to report as to whether any gain could be 
made through the introduction of scientific management. Their 



THE ORGANIZATION OF INDUSTRY 225 

shops had been run for many years under a good superintendent and 
with excellent foremen and workmen, on piecework. The whole 
establishment was, without doubt, in better physical condition than 
the average machine shop in this country. The superintendent was 
distinctly displeased when told that through the adoption of task 
management the output, with the same number of men and machines, 
could be more than doubled. He said that he believed that any such 
statement was mere boasting, absolutely false, and instead of inspir- 
ing him with confidence, he was disgusted that anyone should make 
such an impudent claim. He, however, readily assented to the propo- 
sition that he should select any one of the machines whose output he 
considered as representing the average of the shop, and that we should 
then demonstrate on this machine that through scientific methods 
its output could be more than doubled. 

The machine selected by him fairly represented the work of the 
shop. It had been run for ten or twelve years past by a first-class 
mechanic who was more than equal in his ability to the average 
workmen in the establishment. In a shop of this sort, in which 
similar machines are made over and over again, the work is neces- 
sarily greatly subdivided, so that no one man works upon more than 
a comparatively small number of parts during the year. A careful 
record was therefore made, in the presence of both parties, of the 
time actually taken in finishing each of the parts which this man 
worked upon. The total time required by him to finish each piece, 
as well as the exact speeds and feeds which he took, were noted, and 
a record was kept of the time which he took in setting the work in 
the machine and removing it. After obtaining in this way a state- 
ment of what represented a fair average of the work done in the shop, 
we applied to this one machine the principles of scientific management. 

By means of four quite elaborate slide-rules, which have been 
especially made for the purpose of determining the all-round capacity 
of metal-cutting machines, a careful analysis was made of every 
element of this machine in its relation to the work in hand. Its 
pulling power at its various speeds, its feeding capacity, and its 
proper speeds were determined by means of the slide-rules, and 
changes were then made in the countershaft and driving pulleys so 
as to run it at its proper speed. Tools, made of high-speed steel, 
and of the proper shapes, were properly dressed, treated, and ground. 
(It should be understood, however, that in this case the high-speed 
steel which had heretofore been in general use in the shop was also 



226 MATERIALS FOR ELEMENTARY ECONOMICS 

used in our demonstration.) A large special slide-rule was then made, 
by means of which the exact speeds and feeds were indicated at which 
each kind of work could be done in the shortest possible time in this 
particular lathe. After preparing in this way so that the workman 
should work according to the new method, one after another, pieces 
of work were finished in the lathe, corresponding to the work which 
had been done in our preliminary trials, and the gain in time made 
through running the machine according to scientific principles ranged 
from two and one-half times the speed in the slowest instance to 
nine times the speed in the highest. 

[In the case of a factory where a staff of girls inspected balls to 
be used in the bearings of bicycles] — the final outcome of all the 
changes was that thirty-five girls did the work formerly done by one 
hundred and twenty. And that the accuracy of the work at the higher 
speed was two-thirds greater than at the former slow speed. 

The good that came to the girls was: first, that they averaged 
from 80 to 100 per cent higher wages than they formerly received; 
second, their hours of labor were shortened from io| to 8| per day, 
with a Saturday half -holiday, and they were given four recreation 
periods properly distributed through the day, which made overwork- 
ing impossible for a healthy girl; third, each girl was made to feel 
that she was the object of especial care and interest on the part of 
the management, and that if anything went wrong with her she 
could always have a helper and teacher in the management to lean 
upon. 

The benefits which came to the company from these changes 
were: first, a substantial improvement in the quality of the product; 
second, a material reduction in the cost of inspection, in spite of the 
extra expense involved in clerk work, teachers, time study, over- 
inspectors, and in paying higher wages; third, that the most friendly 
relations existed between the management and the employees, which 
rendered labor troubles of any kind or a strike impossible. 

Brickla3dng is one of the oldest of our trades. For himdreds of 
years there has been little or no improvement made in the imple- 
ments and materials used in this trade, nor in fact in the method of 
laying bricks. In spite of the millions of men who have practiced 
this trade, no great improvement has been evolved for many gener- 
ations. Here, then, at least, one would expect to find but Uttle gain 



THE ORGANIZATION OF INDUSTRY 227 

possible through scientific analysis and study. Mr. Frank B. Gilbreth 
who had himself studied bricklaying in his youth, became interested 
in the principles of scientific management, and decided to apply 
them to the art of bricklaying. He made an intensely interesting 
analysis and study of each movement of the bricklayer, and one 
after another eliminated all unnecessary movements and substituted 
fast for slow motions. He experimented with every minute element 
which in any way affects the speed and the tiring of the bricklayer. 

He developed the exact position which each of the feet of the 
bricklayer should occupy with relation to the wall, the mortar box, 
and the pile of bricks, and so made it unnecessary for him to take 
a step or two toward the pile of bricks and back again each time a 
brick is laid. 

He studied the best height for the mortar box and brick pile, and 
then designed a scaffold, with a table on it, upon which all of the 
materials are placed, so as to keep the bricks, the mortar, the man, 
and the wall in their proper relative positions. These scaffolds are 
adjusted, as the wall grows in height, for all of the bricklayers by a 
laborer especially detailed for this purpose, and by this means the 
bricklayer is saved the exertion of stooping down to the level of his 
feet for each brick and each trowelful of mortar and then straighten- 
ing up again. 

As a result of further study, after the bricks are unloaded from 
the cars, and before bringing them to the bricklayer, they are care- 
fully sorted by a laborer, and placed with their best edge up on a 
simple wooden frame, constructed so as to enable him to take hold 
of each brick in the quickest time and in the most advantageous 
position. In this way the bricklayer avoids either having to turn 
the brick over or end for end to examine it before laying it, and he 
saves, also, the time taken in deciding which is the best edge and end 
to place on the outside of the wall. In most cases, also, he saves 
the time taken in disentangling the brick from a disorderly pile on 
the scaffold. This "pack" of bricks (as Mr. Gilbreth calls his 
loaded wooden frames) is placed by the helper in its proper position 
on the adjustable scaffold close to the mortar box. 

We have all been used to seeing bricklayers tap each brick after 
it is placed on its bed of mortar several times with the end of the 
handle of the trowel so as to secure the right thickness for the joint. 
Mr. Gilbreth found that by tempering the mortar just right, the 
bricks could be readily bedded to the proper depth by a downward 



228 MATERIALS FOR ELEMENTARY ECONOMICS 

pressure of the hand with which they are laid. He insisted that his 
mortar mixers should give special attention to tempering the mortar, 
and so save the time consumed in tapping the brick. 

Through all of this minute study of the motions to be made by 
the bricklayer in laying bricks under standard conditions, Mr. Gilbreth 
has reduced his movements from eighteen motions per brick to five, 
and even in one case to as low as two motions per brick. He reports 
that a few months ago, in a large brick building which he erected, he 
demonstrated on a commercial scale the great gain which is possible 
from practically applying his scientific study. With union brick- 
layers, in laying a factory wall, twelve inches thick, with two kinds 
of brick, faced and ruled joints on both sides of the wall, he averaged, 
after his selected workmen had become skilful in his new methods, 
350 bricks per man per hour; whereas the average speed of doing 
this work with the old methods was, in that section of the country, 
120 bricks per man per hour. His bricklayers were taught his new 
method of bricklaying by their foreman. Those who failed to profit 
by their teaching were dropped, and each man, as he became pro- 
ficient under the new method, received a substantial (not a small) 
increase in wages. 

The writer has gone thus fully into Mr. Gilbreth's method in order 
that it may be perfectly clear that this increase in output and that this 
harmony could not have been attained under the management of "ini- 
tiative and incentive" (that is, by putting the problem up to the work- 
man and leaving him to solve it alone) which has been the philosophy 
of the past. And that his success has been due to the use of the four 
elements which constitute the essence of scientific management. 

63. CRITICISMS OF SCIENTIFIC MANAGEMENT^ 

There have been nine principal criticisms of scientific manage- 
ment. Three are concerned with its effect on the individual workman 
physically and temperamentally. The others are concerned with its 
influence on labor as a productive group. 

First. — The taking of time studies and the determination and 
setting of a task are a reflection upon the good faith of labor. It sets 
up the relationship of master and slave. This criticism is undoubtedly 
prompted by a sensitiveness which is aroused by too much emphasis, 

' Adapted from pp. 10-16 of H. S. Person's introduction to the volume of 
Addresses and Discussions at the Conference on Scientific Management held by the 
Amos Tuck School of Dartmouth College, October 12, 13, 14, 1911. 



THE ORGANIZATION OF INDUSTRY 229 

in expositions of scientific management, upon the treatment of labor. 
Most expositions have been for the benefit of management, and have 
emphasized the handling of labor. In the application of scientific 
management, however, the managerial force is studied just as keenly 
and reorganized just as thoroughly as is the labor force. Each person 
concerned with the executive operations has a task and is held strictly 
accountable for its performance. In plants in which scientific man- 
agement has been applied, and in such plants only, is labor enabled to 
judge of the efficiency of the executive force and to hold it up to 
established standards of efficiency. Scientific management recog- 
nizes no difference, in determining standards of efiiciency, between 
management, capital goods, and labor. 

Second. — The removal from the workman of individual responsi- 
bility for determining the method of an operation and leaving to him 
attention to the skilful performance only, makes his work uninteresting 
and monotonous and is bound to stunt him intellectually. My own 
observations and the observations of others in plants where scientific 
management has been applied do not support this criticism. The 
first error in the criticism is the assumption that taking from the work- 
man the necessity of going after and selecting the proper kinds of 
material, tools, etc. — and that is one of the principal responsibilities 
of which the redistribution of duties deprives him — takes from him 
something intellectually stimulating. Another error is the assump- 
tion that performing an operation according to the best method is 
intellectually less stimulating than performing it according to an 
inefficient method. A third error is the assumption that a method 
handed down by tradition is intellectually more stimulating than a 
method derived by experiment. 

Third. — The effect of scientific management is to ^^ speed up^' the 
workman, wear him out, and cause him to be cast aside. Again, 
actual investigation in plants so organized does not support this criti- 
cism. Its error is the assumption that the increased productivity 
comes from a greater expenditure of muscular and nervous energy in 
a working day. The increased productivity comes, however, from 
other things; from saving in overhead charges, from the using of 
material in a predetermined correct way, from the using of machinery 
in a predetermined most efiicient way, from the elimination of the time 
a workman wastes in going after material and tools, from the elimina- 
tion of the misapplication of muscular and nervous energy in unneces- 
sary motions, and from compulsory periods of rest, even, which the 



230 MATERIALS FOR ELEMENTARY ECONOMICS 

workman will ordinarily not take for himself. The beginner at golf 
expends more energy in a round of nine holes than the experienced 
player in a round of eighteen; the skilful carpenter expends far less 
energy in planing a board than does the novice. Scientific manage- 
ment strives to teach the workman skill, and to prevent over-exertion 
as much as to prevent loafing. One of the most impressive things to 
the visitor at a plant so organized is the absence on the one hand of 
loitering and on the other hand of haste. 

Fourth. — Scientific management is inapplicable because of the 
mobility of labor; to teach the laborer the best method requires that 
he be retained for a period, but as a rule labor is continually coming 
into and going out of a plant, and before a laborer becomes skilful he 
is of and a new, awkward man has been hired to take his place. This 
criticism over-emphasizeg the mobility of labor; it premises a mobility 
which the average manager does not experience. I once asked the 
manager of a plant organized according to the principles of scientific 
management what was the average time a workman remained with 
him. Eight years, he replied. He stated further that the average 
time was increasing under the new conditions of organization. Scien- 
tific management carries with it its own corrective of the loss which 
comes from too great a mobility of labor. The fact that a workman is 
permitted to work under conditions which render him more produc- 
tive and that he is paid according to his ability keeps him in the plant. 

Fifth. — It inaugurates a spying system among the laborers which 
results in mutual distrust, quarrels, and absence of esprit. I do not 
know what is meant by spying system, unless it refers to the supposed 
fact that, in a sequence of processes, if one workman fails to keep up 
to standard, it will cause loss to another workman who to protect 
himself will have to complain of the first workman. This criticism is 
due to assumptions concerning scientific management which are not 
true. No workman has to complain of another; if a workman is 
derelict the fact is reported automatically to the management by the 
impersonal time slip, and it is the duty of management to relieve the 
situation before any other workman can become aware of it. The 
relationship is not between workman and workman, but between work- 
man and the order-of-work clerk. The persons of whom the 
workman may have occasion to complain are those in the routing, an 
executive, department. And as a matter of fact, finally, I have not 
observed, and no one has reported that he has observed, in a plant in 
which scientific management has become well established, any lack of 



THE ORGANIZATION OF INDUSTRY 231 

harmony in the labor force; on the contrary, it is the consensus of 
opinion that a fine spirit of co-operation is conspicuous in such plants. 

Sixth. — Workmen have had a bitter experience with the piece- 
rate system; have been "speeded up^' by increases in piece-rates only 
to have the rates cut. May not the differential wage system of scientific 
management be used against the workman in a similar way? This 
is a reasonable question. Such a manipulation of the differential 
wage system seems to me to be possible, but I doubt whether it is 
probable. In the first place, the experience of manufacturers who 
have reduced piece-rates has been as bitter as the experience of the 
laborer. They are coming to consider the rate-cutting of the past as 
one of the great blunders of management. It will take exceedingly 
strong temptation to induce them to try it again. In the second 
place, piece-rates in the past have been established without a sufficient 
knowledge of the conditions of production. They gave to the work- 
man all the increase of production except that resulting from reduc- 
tion in overhead costs. The invention of new and improved machines 
brought practically nothing to management, and placed it at a dis- 
astrous disadvantage in competition with firms paying day-wages, to 
which came all the advantages of the introduction of more efficient 
machines. Rate-cutting was compelled by the circumstances of 
competition. Under scientific management, on the other hand, rates 
are determined only after exhaustive investigations of the productivity 
of a laborer in combination with a given machine, and a separate rate 
is estabhshed for every such combination. If a new and more efiicient 
machine is introduced, a new rate is established as the result of a new 
investigation. So long as plants organized under scientific manage- 
ment enjoy the resulting differential advantage in competition with 
plants paying day- wages, there will be little danger of rate-cutting, 
for in proportion as the earnings of workmen increase does the unit 
cost of the product decrease. If the time should come, as it is reason- 
able to expect it will come, when all plants in a competitive industry 
should be organized according to the principles of scientific manage- 
ment, so that the differential advantage would no longer exist, there 
might be temptation to rate-cutting. But under those conditions the 
temptation would be no greater than to cut under the day-wage sys- 
tem. And if unions still existed labor would be in as good a position 
to protect itself in the one case as in the other. 

Seventh. — The increase of efficiency which results from scientific 
management will throw labor out of employment. The untenable 



232 MATERIALS FOR ELEMENTARY ECONOMICS 

assertion that such would be its ultimate effect is not deserving of 
serious consideration. But that there may be temporarily such a 
result in a given industry is possible, if increased demand resulting 
from decreased selling price should not pari passu accompany in- 
creased efficiency in production. It is good economics to assume that 
in the long run improved methods will make employment for a larger 
number of persons; but it is also good sense for the laborer to take 
into consideration the possible immediate consequences of lack of 
employment for a season. The saving factor in the situation is that 
scientific management cannot be applied in a day. To apply it to a 
given plant is a matter of years. The organizing engineers capable 
of applying it with such results in increased productive efficiency as 
have been of late brought to our attention are and always will be few. 
If there is an impending revolution in industry comparable to the 
revolution at the beginning of the nineteenth century, it will be quite 
different in at least one respect: systems of scientific management will 
not be turned out as was cotton and power machinery, in great quanti- 
ties at a relatively low cost and standardized to fit any and all plants. 
Each plant presents a distinct problem to the organizing engineer, a 
problem of several years' duration. There can therefore never be un- 
employment of a large body of men on account of sudden, widespread, 
more efficient organization. The firms which introduce scientific man- 
agement usually enjoy such a differential advantage that they are able 
to make prices which enable them to increase their plants so as to take 
care of the small amount of what would otherwise be surplus labor. 
Eighth. — // is asserted that labor is not allowed to help fix the 
rate of compensation. Labor has as yet expressed no desire to do so. 
In all cases of reorganization rates have been fixed so that labor has 
been able to earn more than it has demanded. If the time should 
come, as it surely will come, when labor asks to be allowed a voice in 
establishing differential rates under scientific management, there is 
nothing in the nature of that form of organization to make it impos- 
sible. On the contrary, it is probable that such co-operation between 
management and labor would work out more smoothly than under 
present conditions. The methods of determining what the combina- 
tion of a machine and a man can do is so scientifically accurate that 
facts could be easily ascertained, and both labor and manager are 
reasonable when they know the facts. Whether labor would enjoy 
the opportunity of helping fix rates would depend on the solidarity 
of the group in making its demand. 



THE ORGANIZATION OF INDUSTRY 233 

Ninth. — // is asserted that scientific management would impair 
the solidarity of labor; that it would break down unionism by substi- 
tuting individual bargaining in the place of collective bargaining for 
which unionism is now struggling. Scientific management aims to do 
away with equal payment to all laborers irrespective of their pro- 
ductivity, but it does not aim to do away with collective bargaining. 
It is possible under scientific management for a union through its 
selected representatives to take a part in determining what is the 
best method of performing an operation, what would be a reasonable 
task, and what would be a reasonable division of the increased returns. 
These things once determined, it would have to permit its individual 
members to be paid according to their individual contributions to the 
increased returns. Scientific management would impair the solidarity 
of unionism to the extent that that solidarity is dependent upon flat 
hour-rates for all men; it would not impair the solidarity by making 
collective bargaining impossible. 

I have not enumerated as a criticism of scientific management the 
assertion that a great number of inefficient, of ''fake," organizing 
engineers is likely to arise to exploit the new profession and to work 
havoc with those plants whose managers they induce to accept their 
services. It is a real danger, but it is not a legitimate criticism of 
scientific management. Managers should realize that ability to organ- 
ize successfully a business depends upon a combination of qualities not 
found together in many men — largeness of vision, capacity for details, 
patience, tact which is born of sympathy, the capacity to analyze and 
to combine, and scientific knowledge of technical processes. 

64. PARTNERSHIP ARTICLES 

James E. Smith and John Doe, both of the City of Chicago, 
Illinois, hereby mutually agree to become partners under the firm 
name of " Smith & Doe" to conduct the trade and business of printing 
in the said city for the period of five years from date. 

The said Smith invests his stock of presses, paper, ink, and other 
material, estimated to be worth ten thousand dollars, and the said 
Doe invests ten thousand dollars in cash. 

Both partners shall give their entire time and shall share losses 
and gams equally. 

All amounts earned or received by either partner for work, mate- 
rials, or anything pertaining to the business, shall be deposited in the 
First National Bank of Chicago in the name of both partners, and 



234 MATERIALS FOR ELEMENTARY ECONOMICS 

shall be checked out as needed for expenses and supplies, by the 
signatures of both partners, and an equal amount shall be drawn 
each Monday morning for each partner for personal expenses, but 
a balance of five hundred dollars shall always be kept and held. 

When the firm shall be dissolved the balance on hand shall be 
divided equally and all debts shall be paid from the money in bank, 
after which the money shall be divided equally between the partners. 

Witness our hands and seals this 25 th day of October, 191 1. 
Attest: James. E. Smith. [l,s.] 

Charles Robinson John Doe. [l.s.] 

65. FORM OF CORPORATION CHARTER 

Certificate of Incorporation 

We, the undersigned, in order to form a corporation for the pur- 
poses hereinafter set forth, under and pursuant to the provisions of 
the Act of the Legislature of the State of New Jersey, entitled "An 
Act Concerning Corporations (Revision of 1896)," and the acts 
amendatory thereof and supplemental thereto, do hereby certify as 
follows: 

ARTICLE I 

The name of the corporation is: 

ARTICLE II 

The principal and registered office of the Company is in the 

Building , New Jersey, and the name of the 

agent therein and in charge thereof, and upon whom process against 
this corporation may be served, is 

ARTICLE III 

The objects for which and for each of which the corporation is 
formed are:^ 

It is the intention that the objects, purposes, and powers specified 
in the clauses contained in this third paragraph shall, except where 
otherwise expressed in said paragraph, be nowise limited or restricted 
by reference to or inference from the terms of any other clause of 
this or any other paragraph in this charter, but that the objects, 

' [This "object clause" varies with the nature of the business. Ordinarily it 
is comparatively simple, but it may be made very broad and comprehensive, as in 
the case of the U.S. Steel Corporation, given in the following selection. — Editors.] 



THE ORGANIZATION OF INDUSTRY 235 

purposes, and powers specified in each of the clauses of this para- 
graph shall be regarded as independent objects, purposes, and 
powers. 

ARTICLE IV 

The following provisions for the regulation of the business and 
the conduct of the affairs of the Company are hereby established: 

The corporation may use and apply its surplus earnings or accu- 
mulated profits authorized by law to be reserved to the purchase or 
acquisition of property, and to the purchase or acquisition of its own 
capital stock from time to time, to such extent and in such manner 
and upon such terms as its Board of Directors shall determine; and 
neither the property nor the capital stock so purchased and acquired, 
nor any of its capital stock taken in payment or satisfaction of any 
debt due to the corporation, shall be regarded as profits for the pur- 
poses of declaration or payment of dividends, unless otherwise deter- 
mined by a majority of the Board of Directors or a majority of the 
stockholders. 

The corporation in its by-laws may prescribe the number neces- 
sary to constitute a quorum of the Board of Directors, which number 
may be less than a majority of the whole number. 

The Board of Directors shall have power, without the assent or 
vote of the stockholders, to make, alter, rescind, or amend the by-laws 
of the corporation, to fix the amount to be reserved as working capi- 
tal, to authorize and cause to be executed mortgages and liens upon 
the real and personal property of the corporation; and from time 
to time to sell, assign, transfer, or otherwise dispose of any or all 
of the property of the corporation, but no such sale of all the property 
shall be made except pursuant to the vote of at least two-thirds of the 
Board of Directors. 

The Board of Directors from time to time shall determine whether 
and to what extent, and at what times and places, and under what 
conditions and regulations, the accounts and books of the corpora- 
tion, or any of them, shall be open to the inspection of the stock- 
holders; and no stockholder shall have any right of inspecting any 
account or book or document of the corporation, except as conferred 
by statute or authorized by the Board of Directors, or by a resolu- 
tion of the stockholders. 

The Board of Directors shall have power to hold its meetings, to 
have one or more offices, and to keep the books of the corporation 



236 MATERIALS FOR ELEMENTARY ECONOMICS 

(except the stock and transfer books) outside of the State of New 
Jersey at such places as may be from time to time designated by them. 

ARTICLE V 

The Company shall be authorized to issue capital stock to the 
amount of dollars. The number of shares of which the capital 
stock shall consist is shares of the par value of dollars each. 

(If preferred stock is desired, insert provisions therefor at this point.) 

ARTICLE VI 

The names and post-office addresses of the incorporators, and the 

number of shares of stock for which severally and respectively we 

do hereby subscribe, the aggregate of our said subscriptions being 

dollars, which is the amount of capital stock with which 

the Company will begin business, are as follows: 

Names ■ Post-Ofl&ce Addresses No. of Shares 

ARTICLE VII 

The duration of the Company shall be perpetual. 
In Witness Whereof, we have hereunto set our hands and seals 
this day of 191 

[L.S.] 
[L.S.] 
[L.S.] 

66. A CHARTER "OBJECT CLAUSE"^ 

III. The objects for which the corporation are formed are: 

To manufacture iron, steel, manganese, coke, copper, lumber, and 
other material, and all or any articles consisting, or partly consist- 
ing, of iron, steel, copper, wood, or other materials, and all or any 
products thereof. 

To acquire, own, lease, occupy, use, or develop, any lands contain- 
ing coal or iron, manganese, stone, or other ores, or oil, and any wood 
lands, or other lands for any purpose of the company. 

To mine or otherwise to extract or remove coal, ores, stone, and 
other minerals, and timber from any lands owned, acquired, leased, 
or occupied by the company, or from any other lands. 

To buy and sell, or otherwise to deal or to traffic in iron, steel, 
manganese, copper, stone, ores, coal, coke, wood, lumber, and other 
materials, and any of the products thereof, and any articles con- 
sisting or partly consisting thereof. 

To construct bridges, buildings, machinery, ships, boats, engines, 
cars, and other equipment, railroads, docks, slips, elevators, water- 

' From the charter of the United States Steel Corporation. 



THE ORGANIZATION OF INDUSTRY 237 

works, gas works, and electric works, viaducts, aqueducts, canals, 
and other water-ways, and other means of transportation, and to 
sell the same or othe?;wise to dispose thereof, or to maintain and 
operate the same except that the company shall not maintain or 
operate any railroad or canal in the state of New Jersey. 

To apply for, obtain, register, purchase, lease, or otherwise to 
acquire, and to hold, use, own, operate, and introduce, and to sell, 
assign, or otherwise to dispose of, any trade-marks, trade-names, 
patents, inventions, improvements, and processes used in connection 
with or secured under letters patent of the United States, or else- 
where or otherwise, and to use, exercise, develop, grant licenses in 
respect of, or otherwise to turn to account any such trade-marks, 
patents, licenses, processes, and the like, or any such property or rights. 

To engage in any other manufacturing, mining, construction, or 
transportation business of any kind or character whatsoever, and 
to that end to acquire, hold, own, and dispose of any and all property, 
assets, stocks, bonds, and rights of any and every kind, but not to 
engage in any business hereunder which shall require the exercise 
of the right of eminent domain within the state of New Jersey. 

To acquire by purchase, subscription, or otherwise, and to hold or 
to dispose of stocks, bonds, or any other obligations of any corpora- 
tion formed for, or then or theretofore engaged in or pursuing, any 
one or more of the kinds of business, purposes, objects, or operations 
above indicated, or owning or holding any property of any kind herein 
mentioned, or of any corporation owning or holding the stocks or 
the obligations of any such corporation. 

To hold for investment, or otherwise to use, sell, or dispose of, 
any stock, bonds, or other obligations of any such other corporation ; 
to aid in any manner any corporation whose stock, bonds, or other 
obligations are held or in any manner guaranteed by the company, 
and to do any other acts or things for the preservation, protection, 
improvement, or enhancement of the value of any such stock, bonds, 
or other obligations, or to do any acts or things designed for any 
such purpose; and while owner of any such stock, bonds, or other 
obligations, to exercise all the rights, powers, and privileges of owner- 
ship thereof, and to exercise any and all voting power thereon. 

The business or purpose of the company is from time to time to 
do any one or more of the acts and things herein set forth; and 
it may conduct its business in other states, and in territories, and 
in foreign countries, and may have one office, or more than one 
office, and keep the books of the company outside of the state of 



238 



MATERIALS FOR ELEMENTARY ECONOMICS 



New Jersey, except as otherwise may be provided by law; and may 
hold, purchase, mortgage, and convey real and personal property, 
either in or out of the state of New Jersey. . 

Without in any particular limiting any of the objects and powers 
of the corporation, it is hereby expressly declared and provided that 
the corporation shall have power to issue bonds and other obliga- 
tions in payment for property purchased or acquired by it, or for 
any other object in or about its business; to mortgage or pledge 
any stocks, bonds, or other obligations, or any property which may 
be acquired by it, to secure any bonds or other obligations by it 
issued or incurred; to guarantee any dividends, or bonds, or con- 
tracts, or other obligations; to make and perform contracts of any 
kind and description and in carrying on its business or for the pur- 
pose of attaining or furthering any of its objects, to do any and all 
other acts and things, and to exercise any and all other powers which 
a copartnership or natural person could do and exercise, and which 
now or hereafter may be authorized by law. 

67. ACTS OF INCORPORATION FOR PRIVATE BUSINESS 

PURPOSES GRANTED IN THIS COUNTRY 

BEFORE THE YEAR 1800^ 



State 


1 

< 

< 




1 


c 
3 


.B 


1 




s 
c3 


.0 

s 
w 

•a 
< 


.a 


a 

1 


a 

e 
6 




B 
1-1 


c 


be 

a 
'S 


> 


■0 


.3 

& 

1 


13 




















I 
5 

I 

2 
3 












I 
7 


16' 




Massachusetts 

Rhode Island 


I 


7 
2 
s 
4 


25 




12 


3 


I 






2 


S 




4 


88 






3 
I 


I 


I 


1 
I 




I 






I 

4 

I 
I 




I 


18 

S 


3 

I 




New York 




21 








Pennsylvania 


2 


2 

I 
3 
2 








I 






4 


































Maryland 








2 
3 
2 
I 








4 
3 










2 
10 

2 
3 








Virginia 


■ 
















2 




20 






















South Carolina. . . . 






I 










2 


































Vermont 






s 

I 






















3 

I 


5 








I 






















































United States 




2 
28 
































Total 


s 


36 


I 


21 


6 


I 


I 


25 


I 


2 


12 


I 


26 


38 


21 









Of the 22s corporations shown in the above table 64 per cent were created in New England, 
states next in order being New York, Virginia, and Pennsylvania. Banks and insurance companies 
make up 24 per cent of the total number. 

' From Simeon E. Baldwin, "Private Corporations," in Two Centuries' Groivth 
of American Law, 1701-1901, p. 312. Charles Scribner's Sons, 1902. 



THE ORGANIZATION OF INDUSTRY 



239 



68. THE HOLDING COMPANY' 
The Atlantic Coast Line Company was chartered in Connecticut 
in 1889 for the purpose of consolidating under one ownership the 
network of southern railways along the Atlantic coast, these railways 

Intercorporate Relationships of the Atlantic Coast Line System 
[Size of rectangles indicates relative amounts of capital stock outstanding. 
Cross-hatching shows percentage of capital stock owned by controlling company.] 



ATLANTIC 



CDA5T 
5T0CH1 |1D.5[|D 



LINE CD. 
I.DDD 



TLINE R.R.CD. 



feDUTHERr 




\ RY. CD. 



GEORGIA R.R. CHIC AGD. INDIA 

LE55EE DRGANIZATIQN 



GEORGIA 



llOUIBVILLE 
RY. CO. 



R.R. 



being amalgamated in 1900 into the Atlantic Coast Line Railroad 
Company. The Atlantic Coast Line Company, the holding company, 
on June 30, 1906, owned (including capital stock subscribed for but 

'From Interstate Commerce Commission, Special Report No. i, Inter cor po- 
rate Relationships of Railivays in the United States as of June 30, 1906 (1908), 
pp. 23-25. 



240 



MATERIALS FOR ELEMENTARY ECONOMICS 



not fully paid) $25,266,300 out of $50,134,200 of the stock of the 
Atlantic Coast Line Railroad Company, or a little over 50 per cent. 
It also owned $11,500,000 of the bonds of the same company. This 



u 
a 


11 1 




is 
s 


^ 




U' 




stock ownership carried with it equities of very great value. This 
becomes clear when we observe that the Atlantic Coast Line Railroad 
owned on the same date $30,600,000 out of $60,000,000 or 51 



THE ORGANIZATION OF INDUSTRY 241 

per cent of the stock of the Louisville and Nashville Railroad 
Company. This latter corporation and its controlling railway, the 
Atlantic Coast Line Railroad Company, were the lessees of the 
railway properties of the Georgia Railroad and Banking Company; 
and the Louisville and Nashville Railroad Company, jointly with the 
Southern Railway Company, owned 88 per cent of the stock of the 
Chicago, Indianapolis and Louisville Railway Company. The capital 
stock of the Atlantic Coast Line Company was reduced in May, 1897, 
from $10,000,000 to $5,000,000 by the issue of certificates of indebted- 
ness in lieu of the shares retired. In 1898 the stock was again restored 
to the original amount of $10,000,000 by a stock dividend of 100 per 
cent, representing the accumulated profits. The company had out- 
standing on June 30, 1906, $10,500,000 of stock (excluding $2,100,000 
of stock subscribed for but not fully paid) and $13,000,000 of certifi- 
cates of indebtedness. It therefore appears that an ownership of 
slightly over $5,000,000 of capital stock in this holding company 
controlled solely and jointly through ownership and lease a railway 
system of over 11,000 miles in extent, with a capitalization of over 
$725,000,000.^ 

69. A CLASSIFICATION OF BONDS ^ 

A comprehensive basis for the classification of bonds is not to 
be found in the bond lists nor in current market reports. The names 
and classes thus arranged are for purposes of convenient reference 
and usually follow the practice of the local exchange. Generally 
speaking, bonds receive their titles from one or more of the fol- 
lowing characteristics: (i) The character of the corporation using 
them; (2) the purpose of issue; (3) the nature of security given 
for payment; (4) the terms of payment, and (5) evidence of owner- 
ship and transfer. The first of these five characteristics is used as 
a basis for general classification. That is to say, quotations are 
usually arranged under the following heads: 

Government — state and national. 

Municipal and county. 

Railroad, express, and steamship companies. 

Traction companies. 

■[See also Selection 90: "Companies whose Stocks were Acquired by the 
United States Steel Corporation." — Editors.] 

* Adapted from F. A. Cleveland, "Classification and Description of Bonds," 
in Annals of the American Academy of Political and Social Science, XXX, 400-411 . 



242 MATERIALS FOR ELEMENTARY ECONOMICS 

Gas, electric light, and water companies. 

Bank and trust companies. 

Investment companies. 

Industrials. 

Mining companies. 

Miscellaneous. 

CLASSIFICATION ACCORDING TO PURPOSE OF ISSUE 

Among the many varieties of bonds which take their names from 
the purpose of issue the following may be noted: 

Adjustment bonds, bridge bonds, construction bonds, consoli- 
dated bonds, car trust bonds, dock and wharf bonds, equipment 
bonds, extension bonds, founders' bonds, ferry bonds, general bonds, 
improvements bonds, interim bonds, interest bonds, purchase money 
bonds, refunding bonds, reorganization bonds, revenue bonds, sub- 
sidy bonds, terminal bonds, tunnel bonds, temporary bonds, unified 
bonds. 

CLASSIFICATION OF BONDS ACCORDING TO THE CHARACTER OF SECURITY 
PROVIDED FOR PAYMENT 

From the point of view of the security given for payment, bonds 
fall into two general classes, viz., (i) unsecured, and (2) secured. 
The secured bonds may again be divided into two general classes {a) 
those having personal security and (b) those secured by liens on 
specific property. These in turn may be subdivided as follows: 

I. Unsecured. 

a) Government bonds. 

b) Corporate debentures. 
II. Secured. 

a) Personal security. 

1. Indorsed bonds. 

2. Guaranteed bonds. 

a) Guaranteed as to principal. 

b) Guaranteed as to interest. 

c) Guaranteed as to both principal and interest. 

b) Lien security. 

I. By character of property pledged. 
a) Real property. 

1. Land grant bonds. 

2. Real estate bonds. 



THE ORGANIZATION OF INDUSTRY 243 

b) Personal property. 

1. Collateral trust bond. 

2. Sinking fund bonds. 

2. By the character or priority of lien. 

a) First, second, or third mortgage bonds. 

b) General mortgage bonds. 

c) Blanket mortgage bonds. 

d) Consolidated mortgage bonds. 

e) Income bonds. 

/) Profit-sharing bonds. 
g) Dividend bonds. 

3. By the character of the holding participation receipts. 

BONDS CLASSIFIED ACCORDING TO EVIDENCE OF OWNERSHIP AND 

TRANSFER 

Considered from this viewpoint there are three classes, viz., 
coupon bonds, registered bonds, and coupon registered bonds. 

Coupon bonds are issues the contracts for payment of interest on 
which are evidenced by separate coupons or contracts for payment, 
which fall due consecutively on the interest-paying dates. The 
coupons may be detached and constitute complete promissory notes 
in themselves, payable to bearer. The coupons are usually written 
on small sections of a sheet of paper attached to the principal obliga- 
tion and as they mature are clipped off and presented for payment. 
They are frequently presented for payment through a bank as a 
check or draft would be. 

Registered bonds are credit instruments the interest obligation 
in which is expressed in the same writing or paper as in a promissory 
note, the ownership of the bond being registered as a means of pro- 
tecting the payee against loss, necessitating a formal transfer and 
registration to transfer the title when the old instrument is canceled 
and a new one issued. Interest is payable by money delivery or 
by check sent by mail to the address of the registered holder. Notice 
should be given of any change in address. 

Registered coupon bonds are issues the principal of which is regis- 
tered, the coupons being made payable to bearer. 

In practice a single bond issue may have any number of these 
many distinguishing characteristics, so long as they are not in con- 
flict. When applied to specific issues the number of classes may 
be equal to the mathematical possibility of the several elements 



244 MATERIALS FOR ELEMENTARY ECONOMICS 

described in combination. The advantage of the analytical classi- 
fication here used is that by classifying and defining bond character- 
istics the terminology may be understood in any combination used. 

70. EXAMPLES OF TYPICAL INVESTMENT SECURITIES 

On the following pages are printed examples illustrating typical 
forms of bonds and of stock certificates.' The reproductions are in 
no cases facsimiles. They do, however, repeat the wording of the 
original documents. 

' The examples of bonds are taken from W. G. Sumner, Specimens of Investment 
Securities. E. P. Judd Co., 1901. The forms of stock certificates are taken from 
actual certificates. 



o 

On 



o 
o 
o 

o" 
o 

d 
Z 



^ 



CO 
(U 

cd 

•4-» 

D 



CO 
CO 

o 
U 



U 

9x1 

o 






V ^ 'o 



6 O o 



o 



W 






3 2^ 



3 < 



15 <u .« 



W 3 S 



a o 



4) IH *-< 

Q ^ 

•2 S 

t7 03 



■o ^ 

3 



o is 

•d c 

Cu 3 
lU u 

-^ '^ >v 

4-> C^ eg 

gem 
^ 3 .2 

U C c3 

3 ^ g 
'n a o 



4" C K 
N 3 W 



•- !:? !2 fi 



cd 3 "* 

w rt 4> 

-° o -S 

4) *J 

-wo™ 

o < ^ 

« -5 S 






00 O CAJ 



B 4j 






3 *J 



c 5 c :2 <-o 



c -2 

« -a 

CO C 

3 t^ 

O 00 



03 aj 
<n -3 

^3 



O .5 



fe o s iJ 



< ^ P 2 H 

« 3 a ^ == 



^ 3 C 
^ 3 S 
> 3 I 



% B 






•s. 



f< 



a 

3 
O 

U 



M 



3 



w 



fti 



^ •-' 



pq 






u .^ 



a 
o 
U 




.'S 



03 





73 M 




oo 




pq >H 




-d & 




3! 




■J "o 




i.§ 




I- o 




v 




Q, W 




77 -c 




U 4-> 




•S a 




tM — 




^- b 




rt C 




u ri 




>^ 9- 




^i 




(3 O 




D ., 








H ^ 




8 "^ 




2 b" 




^ c 








60 *J 




■K «5 




o <u 




^1 




2 ^ 




;- a, 




(^ r 


,__, 


>. s 


•« 


C b 


u 


:i3 u 


« 


a, -a 


•o 


a£ 


1 


6^ 


^ 


-d «« 


■:2 


c<3 ^^ 


>5 


O «3 


t-^ 


J- a 








2 3 




^i CL, 



CO 

12 


"§ 


"o 


d 


tn 




C 




O 


b 


U 


cd 


[/3 


3 


o 


C 


^ 


rt 


S 

_3 


1— . 

_4J 


U 


3 


o 


cd 



J3 
bO 






t3 

C 
o 



•■- CO f^ 












m 



H 



23 CIS 
5 j«s >- 



>^ ^ 

^ S" 

^ 33 

S i=i 

ed o 

a c 

5 « 

U S 

2 ^ 

(U J 

U - 

j3 •- ' 

1 <" 

I rS 

►-> T3 

Oi O 

t" c3 

W bc 

W •(-> 

F-l ^ 

M o 

5 S 



-a 

3 



8 
u 
•« 






S 
o 
U 



ifl 



o 



o 

;2; 



cd 






(U 



u 



>> 17 « 
a. O 

=: (3 w 

•r; O H 
S pg c/i 

>> « kJ 

cij cd 
a, bC td 

St 
o o 

us 

^ to 

Pi .ti 

*j a 

4) O 

4) 

£ if 

•" 3 

^ tn 

d u 
O .S 



-5 2 

6 d 

00 .a 

_ XI 

O j» 
•73 ^ 

4-1 d 
tn <u 

4) '^ 

:2 ^~ 

Ui 






u 



[Form of Assignment on the Back of the Pennsylvania Railroad 
Company Stock Certificate] 

f ^ that , the under signed, for value received, have bargained, 

< sold, assigned, and transferred, and by these presents do 

;j OS 



U 

< ^ 



^ bargain, sell, assign, and transfer, unto 

^ Z 

S a 

S S 

> a 
" 

« B 

1 

S z Shares of the Capital Stock of The Pennsylvania 

t g Railroad Company, and do hereby constitute and appoint 

a 

s y^ 

H 

M ^ 

S 

ol 
p. H 

a 
« s 

^ jf a7w/ Attorneys one or more to substitute with like full power 

T. 5 

^ i 



/rwe and lawful Attorney, irrevocable, for and in- 



name and stead, but to the use of the above-named assignee 
to make and execute all necessary acts of assignment and 
transfer of the said stock on the books of the said Company ^ 



for the purposes aforesaid, hereby ratifying and confirming 
t B all that said Attorney, or his substitute or substitutes shall 



I « lawfully do by virtue hereof. 
•J * 



3n/ \l) iine&A CU.KeA.co|, have hereunto set 

hand and seal, this day 



s z - 

H g of one thousand nine hundred 

a u 

H E and 

Ik — LS 

sf,% Signed, Sealed, and Delivered 
a 5f in presence of 



■ ■ 


in 

< 
m 


m m 



m ■ 




■ ■ 



by 






w 



4a 






€^ 



HUDSON TRUST COMPANY, 

TRANSFER AGENT, 



ASS'T SECRET AH-1". 



<^ -^ «ii "ai -^ (o 



g»«<S-SS.g w'TS S S^ SN"* ■« ' 



c§0-« 8 S S ;:^ 
S ^ _, o J> S « 









•■«^'S' 



"tt 



-« 






S'^'S o « ^ 



^0 



s 






•§ :: i '^ s ^ »3 



a « g 5 s j: 



a w 
- S.^ 

;ii £i Jj 



'^8 



iij|«tiiis 



8 s 



.^-g^^^i^-srS 









io-^^^sr i|vSi"s. 



is^'S-^ « 









gr«' 



s^C 



t3 o O 






S'^ s 



§^8S--ili'?"=i|^ 












g 5 S-Q 



a~^-»- S u sal's. 



^ ^"^ s,^ ^.-^ g-^i 

? »; -S -^^ S g ^ J 



-8 <o 2 -S a S 






^ 5 

■a t? 
8 ■«^ 

"^^ S « o g 



■« (i "= ^ ■§, 
8 -2 -S B o 

i SS I g L« . § 
fe « K §'-' ^2-^ 



!!"8 



■a o S S o^S ^ « s^ s . H 






^-8 



•«^-fe.s O 



'■^ 



.■S 5 8 









,^ S 8 

S ,*5 « 



!-8^S 



§■5 8 



4 









list's §-§1^^^ 



Gfr^ 2^-S^'^^^-I.g^a 



i:85^;§-f^8« 



u e « 



Aavxaaoas x.ssv 



uxsioLia 





Kq 



ANVdWOD iSn Ul ONV AllUnoaS NM OA M3N 
: aanaxsioaa 



[Form of Assignment on the Back of the United States Steel Corporation 
Preferred Stock Certificate] 



p ^ ^ 

For value Received hereby sell, assign, and transfer unto » g § 

.HO 
^ ^ M 

H » " 

a > H 

5* 
t1 2 H 



Shares ! % 2 



Attorney 



H 
2! 5? 



o/ //?6 Capital Stock represented by the within Certificate h « J; 

> ^ 



H ^ J 

» S G 

z S 



and do hereby irrevocably constitute and appoint S ^ h 

* 



3 H 
2 B ^ 

K 

^ '^ 'i 

A >^ S 

B g 3d 

/o transfer the said stock on the Books of the within named r q > 

a "^ 1 
Corporation with full power of substitution in the premises, g g § 

H H 

2 « ? 
►5 S! H 

^ > I ^ 

- a 5 g 

5 H 2 

n ^ 
In Presence of ^ ^ d 

? "fl < 

^ > H 

S § B 

■ — B I 

» ? H 



2 52 MATERIALS FOR ELEMENTARY ECONOMICS 

71. THE BASIS OF CAPITALIZATION' 

^ I. ORIGINAL INVESTMENT 

The popular theory on this subject is that capitahzation should be 
based on the original cost of the property or the actual investment of 
capital in the enterprise. The stocks and bonds should represent 
money paid in. It is contended that investors are entitled to fair 
returns upon this amount, but to nothing more. 

The proposition that capital be limited to the real investment 
seems, on first examination, to be a fair one, but further reflection 
will show that there are certain objections to such a rule. In some 
cases the actual amount invested in the enterprise would give too high 
and in other cases too low a capitalization. This basis would give 
too high a capitalization in cases where the original cost, on account of 
high price of labor, high rate of interest, incompetence of manage- 
ment, or other causes had been much greater than would be the present 
cost of building the road. Another factor has been cogently stated in 
a recent case— 

The state can not permit the capitalization of dishonesty, extravagance, 
or incompetence, nor can it permit the burden of obsolete industrial pro- 
cesses or administration to be laid on future generations. 

It is unquestionable that in the case of many Western roads capital 
was recklessly squandered in the process of construction. The basis 
of original cost would give too low a capitalization in the case of roads 
which have been compelled, in the interest of unity and efficiency of 
service, to make heavy expenditures for the purchase of competing or 
contributing systems. The public has no legitimate claim to all 
gains resulting from economy in the refunding of indebtedness and 
in the operation of roads. It seems not unreasonable that skillful 
management should be capitalized to some extent. 

II. EARNING CAPACITY 

The preference of railroad financiers for earning capacity as a 
basis of railroad capitalization is easily understood. Capitalization 
on this basis enables a road to conceal the extent of its profits and to 
absorb increasing revenue without incurring public displeasure and 
arousing agitation for lower rates. Furthermore, a company that is 
highly capitalized can usually be sold to better advantage than one 

' Adapted from the Final Report (Vol. XIX) of the Industrial Commission 
(1902), pp. 408-15. 



THE ORGANIZATION OF INDUSTRY 253 

with a low capitalization. As has been observed, people seem to like 
to deal in large figures, and the average investor prefers to buy 200 
shares of stock quoted at 50 and paying, say, 3 per cent, than 100 
shares of stock quoted at par and paying 6 per cent. A large capitali- 
zation, therefore, is thought to confer some advantage for purposes 
of sale. 

There are two legitimate arguments which may be advanced in 
favor of capitalization on the basis of earning capacity. One is that — 
in no other way can the risks incident to the novel enterprise, repelling 
timid capital, be overweighted by possible profits through premiums in 
the form of securities purchasable at discount. 

This argument does not hold, however, in the case of railroad 
undertakings that involve no real initial risk; and it is probably true 
that the element of risk in most railroad enterprises projected in recent 
years is very inconsiderable. The second argument is more weighty. 
It is contended that a quick capital, in the form of credit or cash, is 
needed for the profitable operation of any plant. As stated — 

Without such working capital the plant, not being a "going" concern, 
loses much of its value. Consequently, it is urged, capital in excess of the 
value of the plant may rightfully be created for this purpose by the sale of 
stocks or bonds. 

The force of this argument is considerably qualified by the con- 
sideration that a railroad corporation possesses a valuable franchise, 
attachable for debt, which seems to give sufficient security to enable 
it to obtain working capital by the ordinary means. 

The chief objection to capitalization on the basis of earning 
capacity is that it obscures the relation between rates, wages, and 
profits. It is impossible to discover, without a careful appraisal of the 
property, whether an overcapitalized road is earning more than a fair 
return upon the investment. The principle is generally accepted at the 
present time that capital is not entitled to more than a certain fair 
rate of profits. The issuance of additional securities on the basis of 
increasing earning power makes it possible for a company covertly to 
secure exorbitant returns on the actual investment. This objection 
seems conclusive against the policy of full capitalization up to the 
limit of earning power. 

•III. COST OF REPRODUCTION 

Neither original cost nor earning power, then, furnishes an entirely 
satisfactory basis of capitalization. As a substitute, cost of repro- 



254 MATERIALS FOR ELEMENTARY ECONOMICS 

duction has been suggested, and in some cases applied. By this is 
meant simply the actual cost of laying down the roads at the present 
time, including proper allowance for value of terminals and right of 
way. Whether the present capitalization of American railroads is 
in excess of the probable cost of reproduction is disputed. By some 
it is asserted that railroad capital is much greater than the cost of 
constructing the roads at the present time. By others it is declared 
to be actually less. 

IV. COMBINATION OF FACTORS IN CAPITALIZATION 

It would seem that a fair basis of capitalization is to be found only 
by taking into consideration both cost of reproduction and earning 
capacity. The United States Supreme Court, in the case of Smythe 
vs. Ames has decided that the following items should be considered 
in estimating the value of railroad property: The original cost of 
construction, the amount expended in permanent improvements, the 
amount and market value of its bonds and stock, the present as com- 
pared with the original cost of construction, the probable earning 
capacity of the property under particular rates prescribed by statute, 
and the sum required to meet operating expenses. The Nebraska 
Maximum Freight Rate Case also bears directly upon this issue. 

A valuation of railroad property, with regard to both cost of 
reproduction and earning capacity, was undertaken recently by the 
Board of Tax Commissioners of Michigan. The commission under- 
took, first, to appraise the physical properties of the roads, and, 
second, to appraise what might be termed the nonphysical elements 
in their value. In appraising the physical properties the cost of 
reproduction was taken as a basis. This was determined by a thorough 
survey of the roads, made by experts. The nonphysical elements of 
railroad property, which constitute what is usually called the franchise 
value of railway corporations, were valued according to a plan devised 
by Professor Henry C. Adams. This value was determined (i) by 
deducting aggregate expenses of operation from gross earnings and 
adding the income from corporate investments; (2) by deducting from 
the total income thus obtained an amount properly chargeable to 
capital — that is, a certain per cent on the appraised value of the 
physical properties — rents paid for the lease of property operated and 
permanent improvements charged directly to income; (3) by capitaliz- 
ing the remainder at a certain rate of interest. Exceptions from this 
procedure were made in the case of particular roads peculiarly situ- 



THE ORGANIZATION OF INDUSTRY 255 

ated. This method of valuation would seem to give the true basis of 
capitalization, which would then represent both the cost of repro- 
ducing the property and the franchise value arising from surplus 
earning capacity. Such a valuation of railroad property is useful 
for purposes both of taxation and of rate making. 

The relation of capitalization to rates is a much-debated question. 
Opinions differ as to whether overcapitalization results in an increase 
of freight and passenger charges. Hon. Martin A. Knapp, Chairman 
of the Interstate Commerce Commission, testified before the Indus- 
trial Commission that he had not seen an instance in which rates 
seemed much to depend upon or be influenced by the capitalization of 
the road. Capitalization, he held, cuts no figure in the rate question. 
He admitted, however, that when the reasonableness of a particular 
rate was called into question, capitalization had to be considered in 
determining what the road in question ought to charge. In deciding 
upon the reasonableness or unreasonableness of a road's charges the 
Interstate Commerce Commission takes into consideration its 
financial condition. If a road is embarrassed with fixed charges of 
large amount, a rate may be justifiable which would be altogether 
unreasonable in the case of a road with only slight incumbrances 
of indebtedness. 

Mr. T. L. Woodlock, a witness before the Industrial Commission, 
also maintains that rates are not affected by overcapitalization. 
Capitalization, he declares, has no bearing whatever on rates or 
earnings. It is a resultant of forces, and not a force itself. Similarly, 
Mr. H. T. Newcomb, then chief of the Division of Statistics of the 
United States Department of Agriculture, is of the opinion that stock 
watering has no material bearing on rates. In support of this opinion 
the general fact of the heavy decline in railroad rates since 1870 is 
cited. Mention is also made of particular roads which have increased 
their capitalization and at the same time reduced rates. The New 
York Central has increased its capitalization since 1892 from $202,000 
to $348,000 per mile, yet rates have steadily declined. On the other 
hand, the Southern Pacific has a remarkably low capitalization of 
only $18,000 per mile, yet its rates are so high as to arouse public 
antagonism. 

It may be conceded upon this point that fixed charges and divi- 
dends do not directly affect rates. The main consideration in the 
adjustment of railroad charges is the development of traffic. The 
cost of service enters in only so far as the actual expense of hauling 



256 MATERIALS FOR ELEMENTARY ECONOMICS 

goods constitutes a minimum below which rates are not reduced. 
Above this minimum, rates are determined by the possibiHty of 
developing traffic. 

But indirectly capital does have some connection with rates. 
In the long run excessive capitalization tends to keep rates high; 
conservative capitalization tends to make rates low. Rates, as we 
have seen, are governed by "what the traffic will bear." An impor- 
tant element in determining what the traffic will bear is the pressure 
of competition, where this exists. Two kinds of competition are to be 
distinguished here, which have been termed, respectively, direct and 
indirect competition. Direct competition is that between lines cover- 
ing the same territory or connecting the same terminals; indirect 
competition takes place between roads having no territory in com- 
mon but serving producers who are competing for the supply of the 
same markets. 

Our wheat roads must compete not only with those in Canada, 
but with Indian, Russian, and Argentine railroads, as well as with 
enormous maritime agencies all over the world. This sort of indirect 
competition in the distribution of products puts a certain check upon 
rates, even where direct competition is entirely absent. Where 
competition of either kind exists, rates are not dominated by the 
amount of capitaHzation. But competition in either form is not 
always present. Where it is absent, overcapitaHzation with high 
fixed charges and dividend requirements may lead to the raising of 
rates above the amount that would give reasonable returns upon the 
actual investment. 

High capitaHzation tends, moreover, to keep up rates by prevent- 
ing voluntary concessions which might otherwise have taken place. 
A company paying high dividends may find it expedient to lower its 
rates in order that the appearance of exorbitant profits may not 
excite a hostile public opinion. But if returns from excessive rates 
can be distributed in dividends on watered capital, the public is not 
aroused to demand reductions. High capitalization, therefore, has 
at least an indirect bearing on rates. The amount of railroad capital 
is not to be regarded as a matter of no concern to shippers. 



THE ORGANIZATION OF INDUSTRY 257 

72. METHODS OF STOCK WATERING' 

Methods of inflating capitalization are various. Formerly sheer 
fraud was often practiced in issuing stock for speculative purposes. 
Between 1868 and 1872, for example, the share capital of the Erie 
Road was increased from $17,000,000 to $78,000,000 for the purpose 
of manipulating the market. This action led the Board of the New 
York Stock Exchange in 1869 to refuse to quote the Erie shares. 
Another fraudulent device consisted in paying excessive sums to 
dummy construction companies, composed of members of the railroad 
company and their friends. For instance, the original Southern Pa- 
cific road cost actually only $6,500,000; although it is a matter of 
record that $15,000,000 was paid a construction company, and the 
bankers' syndicate, which financed the road, received $40,000,000 
in securities, or an average of $6 in bonds and stock for each dollar 
of actual cost. The same thing happened in connection with other 
Pacific roads. It was also not uncommon for directors of railroad 
companies to purchase other railroad properties, and then sell them 
to their own company at excessive prices. Again, stock has in many 
instances been given away by railroad companies simply as a bonus 
to bait purchasers of the bonds which the concerns were trying to float. 
It is well known that the New York Central, Erie, Reading, St. Paul, 
Chicago and Northwestern, gave away in this manner a portion of 
their earlier stock issues. These flagrant methods of stock watering 
have been largely discontinued during recent years. 

The principal methods of stock watering still employed are the 
following : 

1. The commonest is the payment of so-called stock dividends to 
shareholders. "These consist either of an outright bonus of new 
shares of stocks or bonds, or in a mitigated form, of stocks sold below 
par or at less than market quotations." Examples are the 80 per 
cent stock dividend of the New York Central, in 1868; the Reading 
scrip dividends between the years 1871 and 1876; the Chicago, 
Burlington and Quincy and Atchison stock dividends of 20 per cent 
and 50 per cent, respectively, in 1880 and 1881 ; and the famous Boston 
and Albany distribution of state stock in 1882. 

2. Consolidation of railroad properties offers opportunities to 
increase capital surreptitiously in various ways, (a) One is through 

'From the Fi)ial Report (Vol. XIX) of the Industrial Commission (1902), 
pp. 405-7- 



258 MATERIALS FOR ELEMENTARY ECONOMICS 

the issue of new stock to defray the entire expenses of betterment of 
the operating plant, (b) Sometimes, again, the constituent companies 
are gerrymandered so that the successful concerns with surplus earn- 
ings are combined with roads less favorably situated, thus making 
it possible to distribute earnings at a comparatively low dividend 
rate, (c) The third device connected with consolidation consists in 
substituting a high-grade for a low-grade security. A weak com- 
pany, whose stock is quoted, say, at 50, may be merged in a second 
corporation whose stock stands at 100. The latter may then issue 
new stock worth $100 in exchange for the $50 stock, share for share. 

3. A third method is the substitution of stock issues for funded 
debt. It has the advantage of giving great elasticity to future 
dividend possibilities. The substitution of 8 per cent stock for 4 per 
cent bonds facilitates the absorption of increasing earnings in the 
future. The stocks also permit of cessation of dividends during 
periods of depression. The substitution of stocks for bonds in this 
way is not, however, so harmful to the public interest, provided the 
stock issues are subject to control by state commissions. 

4. Another expedient for increasing capitalization is the funding of 
contingent liabilities. Large amounts of such liabilities, in the form 
of bills payable, wages and salaries due, and the like, may be covered 
by issues of interest-bearing scrip. This is unquestionably bad 
financiering, as floating debts should, in general, be provided for 
out of earnings. 



VII. EXAMPLES OF MODERN CAPITALISTIC 
ORGANIZATION 

A. RAILROADS 

73. TRANSPORTATION COSTS IN THE PIONEER MIDDLE 

WEST' 

About the year 1805, the usual price of carriage over the country 
roads was stated to have been 50 cents for 100 pounds for every 
twenty miles. At this rate, corn, which before 1835 rarely sold for 
as much as 35 cents per bushel, would not stand the expense of 
moving twenty-five miles, even though it had been produced without 
cost. On the same basis, the area in which wheat could be sold at 
a profit to the farmer was limited to a radius of from fifty to seventy- 
five miles. In Kentucky, the most populous state in the West in 
1805, "there was not a single species of product, with the exception 
of ginseng, that would bear the expense of carriage by land from that 
state to Philadelphia." In view of this situation, it is easy to see 
why the farmers turned their corn into whiskey, or fed it to hogs, 
driving the animals to market, rather than attempting to make a 
profit from the sale of the grain. The same condition that made it 
unprofitable for the farmer to ship bulky articles like grain, made it 
impossible for him to import from any great distance tools used on 
the farm, including heavy agricultural implements, and thus, in the 
absence of adequate means of transportation, the burden of manu- 
facture fell upon the small mechanics, chiefly blacksmiths, in every 
locality — a fact which explains the wide dispersion of manufacturing 
industry during the pioneer days. 

Not only were the various portions of the West in a large measure 
isolated from each other, but because of the distance down river by 
way of New Orleans and the ocean to the sea-board cities of the 
Atlantic, and on account of the bad roads over the Alleghany Moun- 
tains, the western region as a whole, before the building of the canals, 
was shut out from any considerable commercial relation with the 
East. These difficulties are reflected in the freight rates prevailing 
between the East and West during the pioneer period. In 1784 it 

'Adapted from Isaac Lippincott, "Pioneer Industry in the West," in The 
Journal oj Political Economy, XVIII, 270-72 (April, 1910). 

259 



26o 



MATERIALS FOR ELEMENTARY ECONOMICS 



cost $249 a ton to bring iron from Philadelphia to Presque Isle (Erie), 
Pennsylvania. Salt, a very necessary article, brought over the moun- 
tains on the backs of animals, sold for as much as eight and ten 
dollars a bushel, its great cost making the quest of salt springs one 
of the very first duties of the western pioneers. Between Pittsburg 
and Wheeling and the eastern cities the freight rate for years ranged 
from $5.00 to $8.00 per hundredweight. To the more distant 
points in the Ohio valley the rate was, of course, higher. The cost 
of bringing one hundred pounds from New Orleans to Pittsburg 
by flatboat or barge during the years 1786 to 181 1 had been about 
$6.75 per hundredweight. In 1802 the cost of carriage from Phila- 
delphia and Baltimore to Lexington, Kentucky, ranged from $7.00 
to $8.00 per hundred. From Baltimore to Zanesville, Ohio, the rate 
was $10.00 in 1818, and up river from New Orleans to Zanesville, 
via Shippingport, it was $6 . 50. 



74. WIDENING OF THE MARKET THROUGH IMPROVED 
TRANSPORTATION 

Assuming wheat to be worth $1 . 00 a bushel and corn 50 cents 
a bushel at the market, and that there are 33 bushels in a ton of each, 
the following indicates the value of a ton of either at given distances 
from the market under varying methods of transportation. It is 
assumed that cost of transportation over the ordinary highway of 





Wheat 


Corn 




Transported over 


Transported over 




Highway 


Early 
Railroad 


Modern 
Railroad 


Highway 


Early 
Raikoad 


Modern 
Railroad 


Value at market 

25 miles distant 

50 miles distant 

100 miles distant 

1 50 miles distant 

200 miles distant 

300 miles distant 

500 miles distant 


I33-OO 
29-25 
25-50 
18.00 
10.50 
3.00 



I33-OO 
32-63 
32.25 
31-50 
30.75 
30.00 
28.50 
25.50 
18.00 
3.00 



$33-00 

32-88 

32-75 

32.50 

32.25 

32.00 

31-50 

30.50 

28.00 

23.00 

18.00 

13.00 

8.00 

3.00 




$16.50 

12.75 
9.00 

1.50 



$16.50 
16.13 

15.75 
15.00 

14-25 

13-50 

12.00 

9.00 

1-50 




$16.50 
16.38 
16.25 
16.00 

15-75 

15-50 

15.00 

14.00 

11.50 

6.50 

1-50 




1,000 miles distant 




2,000 miles distant 




3,000 miles distant 




4,000 miles distant 








5,000 miles distant. . . . 












6,000 miles distant. . . 












7,000 miles distant. 

























MODERN CAPITALISTIC ORGANIZATION 261 

about 1850 was 15 cents per ton mile, over the railroad of that period 
i| cents per ton mile, and over the railroad of today ^ cent per ton 
mile. While the actual figures used are only approximations they 
give a substantially correct conception of the widening of the market 
for a commodity through improved means of transportation. If, 
moreover, we deduct from the values here indicated the farmer's cost 
of growing the grain, it will be better appreciated how extremely 
limited the inland markets were before the railroads came in. 

75. THE RELATION OF THE TRANSPORTATION CHARGE 
TO PRICES' 

The price paid by the housekeeper per dozen for eggs during the 
season of shipment seldom exceeds by more than five cents the price 
received by the western farmer who takes them to the country store. 
That is, the railroads bring eggs a thousand miles to New York for 
a cent or a cent and a half a dozen, and two thousand miles or so for 
about two cents and a half a dozen, the dealers taking the remainder 
of the five cents as payment for handling. The net difference between 
the price paid per pound for butter at the creamery, whether in 
New York City or in the Mississippi Valley, and that paid by the 
New York retail dealer averages about one and one-half cents for 
commission and one cent for freight. 

In December, January, and February turkeys are taken from the 
Texas ranches to marketing centers, the transportation charge on 
ten birds weighing one hundred and twenty pounds being about 25 
cents. After these ten birds have been dressed and packed they 
weigh about one hundred and two pounds, and the freight rate from 
Texas to New York is $1 . 50 for 100 pounds. That is, a Texas 
turkey that retails in the New York market for 20 cents a pound will 
have paid one and three-fourths cents per pound to the railroads that 
took it from the ranch to the concentration point and thence to the 
market. The farmer in Texas received about nine cents per pound, 
leaving a trifle over nine cents to be divided between the packing- 
house, the produce merchant, and the retail dealer. 

The rail rate from Chicago to New York on grain and grain 
products for domestic consumption has been about 175 cents per 100 
pounds; that is, a bushel of oats or corn or wheat, that may bring 
in New York anywhere from 40 cents to $1, has been brought from the 

' Adapted from Logan G. McPherson, Railway Freight Rales, pp. 48-66. 
Henry Holt & Co., 1909. 



262 MATERIALS FOR ELEMENTARY ECONOMICS 

western farm for from eight to fifteen cents. Hay that has yielded 
the farmer $i8 or $19 a ton and sells in New York at about $24 has 
paid the railroads somewhere from $3 to $5 per ton, according to 
whether it came from the meadows of the Ohio or the Mississippi 
valleys. 

On potatoes the freight rate per barrel containing about two and a 
half bushels is $1.05 from Florida, 65 cents from South Carolina, 
45 cents from North Carolina, 30 cents from Virginia, and from this 
12 cents per bushel the rate scales down to five or six cents per bushel 
from nearby regions. The freight rate on tomatoes from Florida is 
25 cents per package of six baskets, from Texas. 15 cents for twelve 
quarts, from Mississippi 76 cents per 100 pounds, and from the nearby 
farms eight cents per bushel of twenty-eight quarts. The freight 
rate on cantaloups to New York ranges from less than a cent for a 
melon from the Carolinas to about two and a half cents for that from 
California. Oranges from Florida to New York pay the railroads from 
four to nine cents a dozen, and those from California six to twelve cents 
a dozen, as they may be large or small. A three-pound can of tomatoes 
from Maryland pays the railroad about one-half cent per can. 

The freight rates to New York on foodstuffs have been selected as 
typical of the transportation charges applying on such commodities 
in the main channels of traffic from the West to the East; and, in so 
far as fruits and vegetables are concerned, from the South to the 
East. The transportation charge per consumer's unit on these 
foodstuffs is a trifle less to Philadelphia and adjacent Delaware and 
New Jersey; another fraction lower to the great Pittsburgh district, 
and still lower to the cities of the West and South that are nearer 
the places of production. As prices of food products fluctuate within 
a fairly wide range and freight rates also fluctuate, though within 
but a very narrow range, the rates and prices specified in the fore- 
going, as well as in the succeeding paragraphs of this chapter, cannot 
be considered as of specific application at any given time in the 
future. They were exact at the time they were collated and will 
very closely approximate accuracy at any period. 

As New York may be considered representative of the places to 
which edible products of the West and South are consigned, so also 
may St. Louis be considered a typical center of reception of the 
manufactured products of the East. The information given in the 
immediately following paragraphs was obtained from merchants and 
manufacturers of that city. 



MODERN CAPITALISTIC ORGANIZATION 263 

The transportation charge on the material entering into a pair of 
shoes made in a St. Louis factory averages one and one-quarter cents. 
The transportation charge required to place that pair of shoes in the 
hands of a consiuner in any part of the United States averages between 
two and three cents. The material entering into an ordinary bed- 
stead, such as retails in St. Louis for $8, will have paid the railroad 
about 40 cents. From ten pounds of nails made in Pittsburgh and 
retailed in St. Louis the railroad will have obtained a trifle over two 
cents, and from ten pounds of wire two and one-half cents. An axe 
made in the Pittsburgh district that retails in St. Louis for $1 will 
have paid the railroads one and one-fourth cents. At Kansas City 
that same axe will have paid freight of a fraction over four cents, and 
at Denver, where the retail price will have advanced to $1 . 30, it will 
have paid 14 cents freight. A padlock retailing in St. Louis at 
50 cents will have paid the railroads a little more than one-half cent; 
at Kansas City it will have paid one cent, and at Denver, where 
the retail price advances to 75 cents, it will have paid two cents 
to the railroads. An eighteen-gallon galvanized iron tub that retails 
in St. Louis at 80 cents will have paid the railroad from place of manu- 
facture two and three-tenths cents; to Kansas City the freight rate 
will have been six and one-fourth cents, and to Denver 15 cents, 
but here the retail price of that tub is $1. A stove that weighs 
two hundred pounds and retails in St. Louis for $1 8 will, in carload lots, 
pay 44 cents to Kansas City or Omaha, and retail there for $22; 
$1 . 48 to Denver, and retail there for $25 ; $2 . 50 to Seattle, and retail 
there for $30. When a housewife of St. Louis buys a dozen clothes- 
pins she has paid the railroad five ten thousandths of a cent. If she 
buys a washboard at 50 cents she has paid the railroad forty-two 
one hundredths of a cent. In Denver she would pay for that wash- 
board 60 cents, of which the railroad would have received two cents. 
The higher rates and prices that have been specified as applying in 
Kansas City and Denver may also be taken as applicable to cities 
in the interior South and Southwest, such as Oklahoma, Fort Worth, 
and San Antonio. 

In response to inquiries made concerning certain staple articles 
of daily and general use in various of the smaller cities and towns 
extending from Massachusetts to Georgia and Illinois, and from 
Michigan to Mississippi, it has been ascertained that throughout 
this region the transportation charge on such articles ranges as 
follows: On a man's suit of clothes, from two to eight cents; on calicoes 



264 MATERIALS FOR ELEMENTARY ECONOMICS 

and ginghams, from one-fiftieth of a cent to one-fifth of a cent a yard; 
the freight charge paid on the entire apparel of a fully dressed man 
or woman in this section would range perhaps from six or seven to 
16 or 18 cents. The rate on an ordinary dining-room suite consist- 
ing of table, sideboard, six chairs, and a china closet would average 
from 75 cents to $5, on a parlor suite of sofa and four chairs from 
50 cents to $4, on a bedstead and its equipment from 75 cents 
to $1 . 50, in each case from the factory to the home. The lumber 
used in the ordinary eight-room house will have paid the railroads from 
$35 to $150, and the brick from $6 or $8 to $50 or $60, as the kiln may 
be near or remote. A fifty-pound sack of flour from the mill, even at 
Minneapolis, in but a few cases has paid a freight rate of over eight or 
nine cents to the consumer. Products of the beef or the hog are car- 
ried from the western packing-houses throughout this territory at rates 
that vary from a fifth of a cent to not exceeding a cent per pound. 

The transportation charge on a pair of rubber overshoes, including 
the rubber from South America, the cotton stock, and the shipment to 
the western markets, averages about two and one-half per cent of 
the cost of those markets. That is, a pair of rubber overshoes retail- 
ing for 75 cents will have paid for transportation, all told, less than 
one and nine-tenths cents. 

The claim of the railroads that the rates on foodstuffs are not high 
enough to enter as a factor in fixing the selling price is fully substanti- 
ated by the statements of the dealers in such products. That is, 
the conditions are, with negligible exceptions, such that if the price 
obtainable in the markets be sufiicient to encourage the growing of 
livestock, grains, dairy products, fruits, or vegetables, the rate of 
freight, from whatever locality to whatever market, is sufficiently 
low to allow the producer to enter that market. His profits are, 
however, as a matter of course, diminished by the amount of freight 
which he pays, and, as a rule, the farther the place of production from 
the markets the greater is the freight charge. The differences in the 
net return to the producer are almost invariably reflected in the value 
of the land, which is lower as the distance from the markets is greater. 
Largely because of the defective system of mercantile distribution the 
grower of foodstuffs obtains a smaller proportion of the price paid by 
the consumer than accrues to the grower of any other agricultural 
product. 

The rates on raw materials are so adjusted as to permit the manu- 
facture of any staple article at any logical place of manufacture. On 



MODERN CAPITALISTIC ORGANIZATION 265 

the raw material of wearing apparel the freight rate is entirely unim- 
portant. On the lumber that enters into building material, on the 
ore, coke, and limestone used in the manufacture of iron and steel 
the freight rate is sufficient to become an appreciable factor in the cost 
of manufacture. On brick, coal, and cement the selling price is the 
higher by the amount of the freight charge, which for distances some- 
times not considerable exceeds the value of the commodity at the 
place of production. The freight charge, even on those heavier 
commodities, however, is far less in proportion to the wage of the 
day laborer as well as to the incomes and salaries received in the 
United States than in any other country. 

Specific complaint in regard to the freight rates of the United States 
for many years has not, except in a small minority of cases, been based 
on the ground that they have prevented foodstuffs from finding a 
market, raw material from reaching places of manufacture, or finished 
products from distribution. While the difference of a cent or two 
in the rate of freight may not in the least interfere with the conduct 
of industry or commerce in the aggregate, such a slight difference may 
perhaps determine whether a manufacturer obtain his raw material 
from this or that source of supply, whether a wholesale dealer obtain 
his stock from the manufacturer in one, or the manufacturer in another 
city, whether a retail dealer make his purchases from the wholesale 
dealer in this city or in that city. That is, for example, the prices of 
the products at the sources of supply being equal, a difference in the 
rate of freight may determine whether Cleveland, Ohio, obtain 
potatoes from Michigan or from upper New York; whether a factory 
in Louisville obtain coal from the fields of southern Indiana or central 
Kentucky. A carpenter in Des Moines may perhaps pay a dollar 
for twenty pounds of nails without knowing or caring what the freight 
rate may have been, or where they may have come from. A differ- 
ence, however, of a few cents a hundred pounds in the rate of freight 
may have led the hardware dealer to have purchased the nails in 
Chicago or St. Louis or even directly from Pittsburgh. 

As the purchase of raw material tends toward the prosperity of 
the region where it is produced, as the operation of a factory tends 
to the increase of population, to appreciation in the value of real 
estate and the augmentation of business at the place of its location, so 
also does the growth of a wholesale business or of a retail business aid 
in the development of its surroundings. Producers, manufacturers, 
wholesalers, and retailers naturally all desire to extend their sales, 



266 MATERL\LS FOR ELEMENTARY ECONOMICS 

to reach further markets in competition with their rivals, and are 
supported in this desire by the communities to whose welfare they 
contribute. Any difference in freight rates that gives a producer of 
raw material, a manufacturer, a wholesale distributer, or a retail 
merchant an advantage over a competitor of another locality is 
therefore promptly made the subject of complaint. 

76. COSTS IN RAILROAD OPERATION^ 

The costs of railroad transportation may be divided into two 
classes: (i) the direct, or variable costs, that is those items of cost 
which represent the extra expenditure to which a rail carrier is put 
by the transportation of any particular shipment, e.g., extra fuel for 
power, handling of the freight, etc. ; (2) indirect or constant costs, in- 
cluding those expenditures which do not vary with each shipment but 
which, within certain limits, remain the same irrespective of the 
amount of traffic carried, e.g., taxes, interest on bonds, a large share 
of the cost of maintaining roadbed, etc. While no sharp line can be 
drawn between direct and indirect costs, it is necessary to examine 
in the rough, the relationship existing between these two kinds of 
cost. 

Railroad expenditures, aside from dividend payments, may be 
divided roughly as follows: 

1. Maintenance of Way and Structures 15 per cent 

2. Maintenance of Equipment 14 " 

3. Conducting transportation 40 " 

4. General expense 3 " 

5. Fixed charges 28 " 

Total 100 per cent 

The expenditures for maintenance of way and structures are 
made up of several items. These expenditures vary, partly with the 
amount of traffic carried, and partly from other influences. Heavy 
hauling wears on rails, roadbed, bridges and culverts, but half loaded 
trains wear nearly as much as loaded ones. The elements of nature 
cause rails to rust, ties to rot, and wash out roadbeds, while bridges 
and culverts both rust or rot, and become out of date. Repairs 
and renewals of fences, road crossings, signs, and cattle guards are 
not in the least affected by the amount of freight hauled. Stations 

' Adapted from J. F. Strombeck, Freight Classification, pp. 11-18, 32. Hough- 
ton Mifflin Co., 191 2. 



MODERN CAPITALISTIC ORGANIZATION 267 

do not wear out, but on account of wind and weather need repainting 
and repairing. Docks and wharves are affected by the volume of 
business, and also by the elements. All wear and tear from the action 
of the elements goes on irrespective of the amount of traffic carried. 
While such wear and tear varies according to climate, soil, rainfall, 
number of bridges, etc., on the whole it may be said that of the total 
expenditures required for maintenance of way and structures, five- 
eighths represent constant (indirect) and three-eighths variable 
(direct) expenses. As maintenance of way and structures represents 
fifteen per cent of the total expenditures aside from dividend pay- 
ments, this makes 9.37 per cent of the expenditures constant and 5 . 63 
per cent variable. 

Likewise the items included under the head of maintenance of 
equipment are part constant and part variable. Rolling stock gener- 
ally needs repairs because worn out. These repairs vary largely with the 
traffic. Cars are, however, worn almost as much by carrying a half as 
a whole load. Engines deteriorate little more from hauling a heavy 
load than from a light one. Locomotives and cars are replaced by new 
ones quite as much because they become antiquated and out-of-date 
as because they are worn out. On the whole it is probably not unfair 
to apportion expenditures for maintenance of equipment equally 
between constant and variable expenses. Maintenance of equip- 
ment payments being 14 per cent of the total payments aside from 
dividend payments, 7 per cent may be called constant costs and 7 
per cent variable. 

Taking up the items which constitute the expenditures for con- 
ducting transportation, it is found that station expense, cost of station 
service and suppKes, switchmen, flagmen and watchmen, signalling 
and similar items are practically constant costs. Such expenses as 
wages of engineers and roundhouse men, cost of fuel and water, train 
service and train supplies, and items of similar nature are variable, 
although the expense for a full train does not differ much from that 
for an empty one. 

Roughly speaking, one third of the expense of conducting trans- 
portation may be taken as constant. These expenditures being 40 
per cent of the total aside from dividend payments there are 26 . 67 
per cent to be added to the variable and 13.33 per cent to the 
constant expenditures. 

The items of general expense are for the service as a whole. They 
are only slightly affected by changes in traffic and should be con- 



268 MATERIALS FOR ELEMENTARY ECONOMICS 

sidered as constant. The several items included under fixed charges 
are also constant. These two, i.e., general expenses and fixed charges, 
amount to 3 per cent, and 28 per cent respectively. 
Summarizing the above gives the following: 

Indirect Direct 

Expenditures (aside from dividend payments) or or 

Constant Variable 

1. Maintenance of way and structures. 9-37 563 

2. Maintenance of equipment , . 7 . 00 7 . 00 

3. Conducting transportation 13-33 26.67 

4. General expense 3 . 00 

5. Fixed charges 28 . 00 

Total 60 . 70 39 • 30 

Thus, approximately 60 per cent of the expenditures analyzed 
are constant and 40 per cent are variable. It must be remembered 
that these expenditures do not include payments for dividends, reserve 
funds, etc., and therefore the proportion of an average freight rate, 
under average conditions, that goes to cover variable expenditures 
is less than 40 per cent of the total. This item of variable expendi- 
tures represents what might well be termed a minimum rate which 
must be charged on every shipment carried. Other traffic will not 
be burdened if additional freight is carried at this minimum rate. 
There are, however, cases in which the rate might properly be even 
less than this minimum. 

One fundamental principle, having almost universal application, 
can be laid down, namely, every freight rate must be at least sufficiently 
high to provide an amount of revenue which equals the direct costs of trans- 
porting the commodity upon which it applies. 

Granting this principle, there remains the question, how shall the 
indirect costs of a railway, and this item includes a fair return on 
investment, be apportioned upon the several unit shipments that are 
carried? This is where the real difficulty in rate-making begins. 
The problems connected with determining the minimum rate are 
largely for the accountant to solve. Those relating to the apportion- 
ment of the constant expenditures upon the unit shipments carried 
are vastly greater and of an entirely different nature, involving a 
consideration of all the industrial and social interests of the country. 

The indirect cost may be apportioned in either of two ways: 
(i) each unit shipment may be made to bear a portion equal to that 
borne by each and every other unit, or (2) the amount that the 
various units shall bear may be, broadly speaking, in proportion to 
their ability to pay. The former method is impracticable because 



MODERN CAPITALISTIC ORGANIZATION 269 

it would make the rate on some cheap commodities so high that they 
could not be transported. The second method is the one that has 
been adopted in order to secure the greatest good to carriers, ship- 
pers, and society in general. 

It is possible to formulate a second fundamental principle govern- 
ing classification and rates, as follows : The indirect costs of transporta- 
tion may be apportioned upon the units of traffic in unequal proportions, 
taking into consideration the ability of each particular commodity to 
pay, but in so doing, no undue or unreasonable preference or advantage 
whatsoever shall be given to any particular party, commodity, or locality. 
This is, in fact, the governing principle of freight classification. 

77. ADDED TRAFFIC PAYS' 

The reason for the continued and rapid building of branches in 
spite of their apparent unproductiveness is simply this: They con- 
tribute traffic to the main line which, as it is merely an increment, 
costs always comparatively little to move, and often nothing at all. 
The company, therefore, receives from its contributed traffic rates 
for a haul of perhaps 500 miles at a cost for hauling due to only 
100 or 200 miles. Rudely speaking, if we call the average cost per 
ton or passenger-mile 100, we may say: 

Average cost per unit of traffic = 100 

Extra passengers, singly, cost ." o-f- 

" " in car-loads cost 5 to 30 

" " in train-loads cost 50 

Extra freight in small lots costs often in both directions and 

usually in one direction o-|- 

" " in car-loads 5 to 20 

" " in train-loads (and all car-loads must ordinarily be 
considered to be made up into extra trains in the 
direction of heaviest traffic) not over 60 

Not unfrequently when a large part of the traffic of a branch 
goes over the main line in the direction of favoring grades it is handled 
over the main line at no appreciable extra cost by simply filling up 
trains, and the branch is then enormously profitable. 

78. A RESULT OF RAILROAD COMPETITION^ 

The Empire Transportation Company, which was the organiza- 
tion which transported the oil over our lines, had engaged in the 
business of refining oil; the Standard Company complained to the 

' From A. M. Wellington, The Economic Theory of ike Location of Railways, 
pp. 732-33. John Wiley & Sons, i8qi. 

^ From testimony of A. J. Cassatt, of the Pennsylvania R.R. Co., in House 
Reports, 50th Congress, ist session, IX, 175-76. 



270 MATERIALS FOR ELEMENTARY ECONOMICS 

officers of the Pennsylvania Railroad Company that they did not 
get fair treatment from the Empire Transportation Company in 
the matter of the distribution of cars when cars were scarce; that 
they did not believe they got as good rates as the Empire Transporta- 
tion Company did, and that in every possible way the Empire Trans- 
portation Company, they believed, favored their own refineries as 
against theirs, and they took the position and stated that they would 
not be subject; they would not transport their oil by an organiza- 
tion which was also a rival of theirs in the refining business. We 
endeavored to try to get those difficulties harmonized; talked of 
getting the Empire Transportation Company to lease its refineries 
to the Standard Oil Company or put them into other hands, but we 
did not succeed in doing that and bringing these two companies 
together in that, and it resulted in a complete breach, and the Stand- 
ard Oil Company took their business off our road, and we had a very 
severe contest from the time they did so until the 17 th of October. 
During that time the Empire Transportation Company itself did 
all the refining it could in competition with the Standard, and all 
the other refineries not connected with the Standard Oil Company 
we induced to come on our line and ship, but we did it at a very 
great loss to the company. We paid very large rebates; in fact, 
we took anything we could get for transporting their oil; in some 
cases we paid out rebates more than the whole freight. I recollect 
one instance where we carried oil to New York for Mr. Ohlen, or 

some one he represented, I think, at 8 cents less than nothing 

I do not say any large quantities, but oil was carried at that rate. 

79. SOME FORMS OF RAILROAD DISCRIMINATION' 

The following are a few of the most important discriminations 
and the methods by which they were obtained: 

(i) For about ten years the New England territory has been in 
control of the Standard Oil Company by reason of the refusal of the 
New York, New Haven and Hartford road and of the Boston and 
Maine road, on all but a few divisions, to prorate — i.e., to join in 
through rates — on oil shipped from west of the Hudson River, and 
by means of the adjustment of published rates. 

The Standard is entitled to the advantage of its water shipping 
points in reaching New England, but that advantage was greatly 
and unfairly increased when the railroads, by refusing to prorate, 

' From the Report of the Commissioner of Corporations on the Transportation 
of Petroleum (1906), pp. xxii-xxv. 



MODERN CAPITALISTIC ORGANIZATION 271 

virtually kept independent refiners from using all-rail routes. The 
refusal to prorate increased the rail rates from the West from 8 to 
10 cents per hundred pounds. These railroads do prorate on all 
other commodities; their refusal to do so in the case of oil amounted 
to imposing a substantial tax on all consumers in the region they 
cover, and is also a heavy discrimination against the smaller refiners. 

(2) The Standard Oil Company has been able to absolutely con- 
trol for many years the sale of oil in the northeastern part of New 
York and in a portion of Vermont by means of secret rates from its 
refineries at Olean and Rochester. 

The Pennsylvania Railroad has given the Standard a rate of 9 
cents a barrel from Olean, N.Y., to Rochester, while the independent 
refineries situated in territory adjacent to Olean were given a rate of 
38 cents a barrel. By means of this g-cent rate, in combination with 
a rate from Rochester to Norwood, N.Y., a virtually secret and very 
low rate from Norwood, N.Y., to Burlington, and secret local rates 
therefrom, the Standard has been able to supply central and northern 
Vermont with oil at a rate of from 15 to 21 cents per hundred pounds, 
whereas no independent refiner could reach that territory from 
western Pennsylvania save by a rate varying from 33 to 50 cents 
per hundred pounds. 

The saving to the Standard during 1904 by the secret rate from 
Olean to Rochester alone was $115,000. This and other less impor- 
tant rates from Olean were unknown to the independent refiners, and 
were not published on the ground that they were wholly State rates; 
yet in fact they were used for oil consigned to points beyond the 
State boundary of New York. Furthermore, all the shipments from 
Olean on these secret rates were blind-billed— i.e., the rates were 
not shown on the waybills. 

(3) The Standard Oil Company has maintained absolute con- 
trol of almost the whole section of the country south of the Ohio 
River and east of the Mississippi by means of secret rates and open 
discriminations in rates from Whiting, Ind. 

For example, the published tariff rate from Whiting, Ind., the 
great western refinery of the Standard, to Birmingham, Ala., was 44 
cents per hundred pounds. For at least ten years the Standard, by 
means of a secret combination of rates by way of Grand Junction, 
Tenn., over the lines of the Chicago and Eastern Illinois, the Illinois 
Central, and the Southern Railway, has shipped oil to Birmingham 
for 29I cents. The Toledo competitor, no farther distant, had to 
pay 47^ cents. 



272 MATERIALS FOR ELEMENTARY ECONOMICS 

A great area in the South has been reached by this same secret 
combination at rates averaging one-fourth less than the published 
rates. The total saving to the Standard on these rates has been 
about $70,000 per year. 

Again, the open rate from Whiting to Evansville, Ind., has been 
for many years 11 cents. The Standard has for about ten years 
shipped oil to Evansville, for local use and for many points beyond 
in the Southeast, at so-called State rates of 6 cents and SJ cents. 
The freight paid by the Standard in this case has been about $10,000 
a year less than the open rate. 

The rates to this same territory from the independent refining 
points at Toledo and Cleveland were from 8 to 28 cents per hundred 
pounds, or from ^ to i| cents a gallon higher than the rate paid by 
the Standard. 

The records of the Chicago and Eastern Illinois Railroad Com- 
pany show plainly that these Grand Junction and Evansville rates 
were intended to be secret, were given for the sole benefit of the 
Standard, and were handled as secret rates with the knowledge of 
Standard officials. 

(4) The Standard Oil Company has for at least ten years shipped 
oil from Whiting to East St. Louis, 111., at a rate of 6 or 6^ cents on 
three of the five railroads running between those places, while the 
only duly published rate on all roads has been 18 cents during all that 
period. The discrimination saved the Standard about $240,000 in 
1904. 

For many years East St. Louis has been the gateway for oil 
shipments by the Standard into the Southwest. The rates from the 
independent refining points of Ohio to East St. Louis have been 
about 12 cents higher than the rate from Whiting, whereas on other 
commodities of similar grade these points pay only about 5 cents 
more than Whiting. 

Whiting is located in Indiana, about two miles from the Illinois 
line. East St. Louis is in Illinois, just across the river from St. Louis. 
The secret low rates were given by the Chicago, Burlington and 
Quincy, Chicago and Alton, and Chicago and Eastern Illinois railroads. 
They were not published on the ground that they were State rates. 
In dealing with these rates, one of the roads — the Chicago and Alton — 
falsely waybilled the freight at 18 cents, and collected from the Stand- 
ard at 6 cents. The Chicago and Eastern Illinois blind-billed its 
shipments. The Chicago, Burlington and Quincy billed and collected 
at the 6-cent rate, but it was none the less secret. 



MODERN CAPITALISTIC ORGANIZATION 273 

(5) In the Kansas-Territory field there are some unfair open 
rates. A more important discrimination has been in the arbitrary 
weights fixed by the railroads on crude oil and fuel oil. This dis- 
crimination prevents the Kansas producer from selling his crude oil, 
especially that of low gravity, advantageously in competition with 
the fuel oil produced by the Standard and the small local refiners. 

Crude oil is charged on the basis of 7.4 pounds per gallon; its 
actual weight is about 7 . 2 pounds. Fuel oil produced by the refineries 
is charged at 6.4 pounds; it actually weighs about 7.6 pounds. 
A barrel of crude oil shipped from Kansas to St. Louis is charged 
nearly 10 cents more than a barrel of fuel oil; this difference in freight 
charges is equal to more than one-third of the price of low-grade 
Kansas crude. 

This discrimination has existed for about four years. It does not 
exist in any other field. The legislation of Kansas in 1905 put an 
end to it so far as shipments within the State are concerned. 

(6) In California direct rebates, as well as discriminations by the 
use of secret rates, have been given on oil. 

These rebates and discriminations benefited the Standard to the 
extent of about $100,000 in 1904. The Associated Oil Company, 
the Union Oil Company, and some consumers of oil also received 
rebates and secret rates, but the Standard apparently received as 
much as all other interests combined. These favors were almost 
invariably denied the ordinary shipper. On shipments to Arizona, 
rebates on state rates were received by the Standard in connection 
with interstate shipments; this virtually was a rebate on interstate 
business. Owing to the fact that fuel oil is extensively sold under 
contract on the Pacific coast rate discriminations obtained by a few 
favored shippers have enabled them to monopolize markets for long 
periods. 

Great injury has been inflicted by railroads upon independent 
shippers through discriminations in the distribution of tank cars. 

(7) Open pubKshed rates from Whiting into a large part of the 
United States have given the Standard Oil Company an unfair 
advantage of from i to 20 cents per hundred pounds. 

This discrimination seriously limits independent refiners in some 
markets, and shuts them out completely from other markets. It is 
accomplished by the use of commodity rates — that is, rates which 
apply only to petroleum and its products — and by refusal to prorate. 

The true principle of commodity rate making is to more nearly 
equahze competitive conditions, but the general effect of commodity 



274 MATERIALS FOR ELEMENTARY ECONOMICS 

rates on oil has been to give the Standard relatively much lower 
rates to common markets than those given to its competitors. 

For instance, in shipments to New Orleans and other points on 
the lower Mississippi River and the Gulf, the ordinary class rates on 
similar low-grade articles from Toledo, Cleveland, and Pittsburgh 
are only 2 cents above the rates from Whiting. The commodity 
rates on oil are from 9I to 13^ cents above the rates from Whiting. 
The normal principle of commodity rates would tend to make the 
charge the same from all four of these points, instead of increasing 
the differential. 

Prior to the establishment of the Whiting refinery the railroads 
west of the Mississippi prorated with the eastern roads on oil ship- 
ments from the Pennsylvania and Ohio districts into most parts of the 
West and Southwest. After the establishment of the Whiting refinery 
these roads refused to prorate from points east of Whiting. This 
refusal increased the natural disadvantage of the eastern refineries by 
from I to 19I cents per hundred pounds. This discrimination is the 
more conspicuous in the case of the southwestern railroads because 
they do prorate with the railroads from Chicago to St. Louis on oil 
from Whiting going to certain sections. 

80. EXTRACTS FROM THE INTERSTATE COMMERCE ACT' 

Section i. (As amended June 2q, igo6, April ij, igo8, and June 
18, igio.) That the provisions of this Act shall apply to any corpo- 
ration or any person or persons engaged in the transportation of oil 
or other commodity, except water and except natural or artificial 
gas, by means of pipe lines, or partly by pipe lines and partly by 
railroad, or partly by pipe lines and partly by water, and to telegraph, 
telephone, and cable companies (whether wire or wireless) engaged in 
sending messages from one State, Territory, or District of the United 
States to any other State, Territory, or District of the United States 
or to any foreign country, who shall be considered and held to be 
common carriers within the meaning and purpose of this Act, and to 

' An act to regulate commerce, approved February 4, 1887, and in effect 
April 5, 1887 (24 Statutes at Large, 379J, as amended by an act approved March 2, 
1889 (25 Statutes at Large, 855), by an act approved February 10, 1891 (26 
Statutes at Large, 743), by an act approved February 8, 1895 (28 Statutes at 
Large, 643), by an act approved June 29, 1906 (34 Statutes at Large, 584), by a 
joint resolution approved June 30, 1906 (34 Statutes at Large, 838), by an act 
approved April 13, 1908 (35 Statutes at Large, 60), by an act approved February 
25, 1909 (35 Statutes at Large, 648), and by an act approved June 18, 1910 (36 
Statutes at Large, 539). 



MODERN CAPITALISTIC ORGANIZATION 275 

any common carrier or carriers engaged in the transportation of 
passengers or property wholly by railroad (or partly by railroad and 
partly by water when both are used under a common control, manage- 
ment, or arrangement for a continuous carriage or shipment), from 
one State or Territory of the United States or the District of Columbia 
to any other State or Territory of the United States or the District 
of Columbia, or from one place in a Territory to another place in the 
same Territory, or from any place in the United States to an adjacent 
foreign country, or from any place in the United States through a 
foreign country to any other place in the United States, and also to 
the transportation in like manner of property shipped from any place 
in the United States to a foreign country and carried from such place to 
a port of trans-shipment, or shipped from a foreign country to any place 
in the United States and carried to such place from a port of entry 
either in the United States or an adjacent foreign country 

The term "common carrier" as used in this Act shall include 
express companies and sleeping car companies. The term "railroad" 
as used in this Act shall include all bridges and ferries used or operated 
in connection with any railroad, and also all the road in use by any 
corporation operating a railroad, whether owned or operated under 
a contract, agreement, or lease, and shall also include all switches, 
spurs, tracks, and terminal facilities of every kind used or necessary 
in the transportation of the persons or property designated herein, 
and also all freight depots, yards, and grounds used or necessary in 
the transportation or delivery of any of said property; and the term 
"transportation" shall include cars and other vehicles and all instru- 
mentalities and facilities of shipment or carriage, irrespective of 
ownership or of any contract, express or implied, for the use thereof 
and all services in connection with the receipt, delivery, elevation, 
and transfer in transit, ventilation, refrigeration or icing, storage, 
and handling of property transported; and it shall be the duty of 
every carrier subject to the provisions of this Act to provide and 
furnish such transportation upon reasonable request therefor, and 
to establish through routes and just and reasonable rates applicable 
thereto; and to provide reasonable facilities for operating such 
through routes and to make reasonable rules and regulations with 
respect to the exchange, interchange, and return of cars used therein, 
and for the operation of such through routes, and providing for 
reasonable compensation to those entitled thereto. 

All charges made for any service rendered or to be rendered in 
the transportation of passengers or property and for the transmission 



276 MATERIALS FOR ELEMENTARY ECONOMICS 

of messages by telegraph, telephone, or cable, as aforesaid, or in 
connection therewith, shall be just and reasonable; and every unjust 
and unreasonable charge for such service or any part thereof is 
prohibited and declared to be unlawful 

And it is hereby made the duty of all common carriers subject 
to the provisions of this Act to establish, observe, and enforce just 
and reasonable classifications of property for transportation, with 
reference to which rates, tariffs, regulations, or practices are or may 
be made or prescribed, and just and reasonable regulations and 
practices affecting classifications, rates, or tariffs, the issuance, form, 
and substance of tickets, receipts, and bills of lading, the manner 
and method of presenting, marking, packing, and delivering property 
for transportation, the facilities for transportation, the carrying of 
personal, sample, and excess baggage, and all other matters relating 
to or connected with the receiving, handling, transporting, storing, 
and delivery of property subject to the provisions of this Act which 
may be necessary or proper to secure the safe and prompt receipt, 
handling, transportation, and delivery of property subject to the 
provisions of this Act upon just and reasonable terms, and every such 
unjust and unreasonable classification, regulation, and practice with 
reference to commerce between the States and with foreign countries 
is prohibited and declared to be unlawful. 

No common carrier subject to the provisions of this Act shall, 
after January first, nineteen hundred and seven, directly or indirectly, 
issue or give any interstate free ticket, free pass, or free transporta- 
tion for passengers, except to its employees and their families, its 
officers, agents, surgeons, physicians, and attorneys at law; to 
ministers of religion, [and to certain others, mainly those engaged in 
charitable work] 

From and after May first, nineteen hundred and eight, it shall 
be unlawful for any railroad company to transport from any State, 
Territory, or the District of Columbia, to any other State, Territory, 
or the District of Columbia, or to any foreign country, any article or 
commodity, other than timber and the manufactured products thereof, 
manufactured, mined, or produced by it, or under its authority, or 
which it may own in whole or in part, or in which it may have any 
interest, direct or indirect, except such articles or commodities as may 
be necessary and intended for its use in the conduct of its business 
as a common carrier. 

Any common carrier subject to the provisions of this Act, upon 
application of any lateral, branch line of railroad, or of any shipper 



MODERN CAPITALISTIC ORGANIZATION 277 

tendering interstate traffic for transportation, shall construct, main- 
tain, and operate upon reasonable terms a switch connection with 
any such lateral, branch line of railroad, or private side track which 
may be constructed to connect with its railroad, where such connec- 
tion is reasonably practicable and can be put in with safety and will 
furnish sufficient business to justify the construction and maintenance 
of the same; and shall furnish cars for the movement of such traffic 
to the best of its ability without discrimination in favor of or against 
any such shipper 

Sec. 2. That if any common carrier subject to the provisions of 
this Act shall, directly or indirectly, by any special rate, rebate, 
drawback, or other device, charge, demand, collect, or receive from 
any person or persons a greater or less compensation for any service 
rendered, or to be rendered, in the transportation of passengers 
or property, subject to the provisions of this act, than it charges, 
demands, collects, or receives from any other person or persons for 
doing for him or them a like and contemporaneous service in the 
transportation of a like kind of traffic under substantially similar 
circumstances and conditions, such common carrier shall be deemed 
guilty of unjust discrimination, which is hereby prohibited and 
declared to be unlawful. 

Sec. 3. That it shall be unlawful for any common carrier subject 
to the provisions of this act to make or give any undue or unreasonable 
preference or advantage to any particular person, company, firm, 
corporation, or locality, or any particular description of traffic, in any 
respect whatesoever, or to subject any particular person, company, 
firm, corporation, or locality, or any particular description of traffic, 
to any undue or unreasonable prejudice or disadvantage in any 
respect whatsoever. 

Every common carrier subject to the provisions of this Act shall, ^ 
according to their respective powers, afford all reasonable, proper, 
and equal facilities for the interchange of traffic between their respec- 
tive lines, and for the receiving, forwarding, and delivering of pas- 
sengers and property to and from their several lines and those con- 
necting therewith, and shall not discriminate in their rates and charges 
between such connecting lines; but this shall not be construed as 
requiring any such common carrier to give the use of its tracks or 
terminal facilities to another carrier engaged in like business. 

Sec. 4. {^As amended June 18, igio.) That it shall be unlawful 
for any common carrier subject to the provisions of this Act to charge 
or receive any greater compensation in the aggregate for the trans- 



V 



278 MATERIALS FOR ELEMENTARY ECONOMICS 

portation of passengers, or of like kind of property, for a shorter 
than for a longer distance over the same line or route in the same 
direction, the shorter being included within the longer distance, or 
to charge any greater compensation as a through route than the 
aggregate of the intermediate rates subject to the provisions of this 
Act; but this shall not be construed as authorizing any common 
carrier within the terms of this Act to charge or receive as great 
compensation for a shorter as for a longer distance : Provided, however, 
That upon application to the Interstate Commerce Commission such 
common carrier may in special cases, after investigation, be authorized 
by the Commission to charge less for longer than for shorter distances 
for the transportation of passengers or property; and the Commission 
may from time to time prescribe the extent to which such designated 
common carrier may be relieved from the operation of this section 

Whenever a carrier by railroad shall in competition with a water 
route or routes reduce the rates on the carriage of any species of 
freight to or from competitive points, it shall not be permitted to 
increase such rates unless after hearing by the Interstate Commerce 
Commission it shall be found that such proposed increase rests upon 
changed conditions other than the elimination of water competition. 

Sec. 5. That it shall be unlawful for any common carrier subject 
to the provisions of this Act to enter into any contract, agreement, 
or combination with any other common carrier or carriers for the 
pooling of freights of different and competing railroads, or to divide 
between them the aggregate or net proceeds of the earnings of such 
railroads, or any portion thereof; and in any case of an agreement 
for the pooling of freights as aforesaid, each day of its continuance 
shall be deemed a separate offense. 

Sec. 6. That every common carrier subject to the provisions of 
this Act shall file with the Commission created by this Act and 
print and keep open to public inspection schedules showing all the 
rates, fares, and charges for transportation 

No change shall be made in the rates, fares, and charges or joint 
rates, fares, and charges which have been filed and published by any 
common carrier in compliance with the requirements of this section, 
except after thirty days' notice to the Commission and to the 
public published as aforesaid, which shall plainly state the changes 
proposed to be made in the schedule then in force and the time 
when the changed rates, fares, or charges will go into effect; and 
the proposed changes shall be shown by printing new schedules, or 
shall be plainly indicated upon the schedules in force at the time 



MODERN CAPITALISTIC ORGANIZATION 279 

and kept open to public inspection: Provided, That the Commission 
may, in its discretion and for good cause shown, allow changes upon 
less than the notice herein specified, or modify the requirements of 
this section in respect to publishing, posting, and filing of tariffs, 
either in particular instances or by a general order applicable to 
special or peculiar circumstances or conditions 

Sec. 10 

Any common carrier subject to the provisions of this Act, or, 
whenever such common carrier is a corporation, any officer or agent 
thereof, or any person acting for or employed by such corporation, 
who, by means of false billing, false classification, false weighing, or 
false report of weight, or by any other device or means, shall know- 
ingly and willfully assist, or shall willingly suffer or permit, any 
person or persons to obtain transportation for property at less than 
the regular rates then established and in force on the line of trans- 
portation of such common carrier, shall be deemed guilty of a mis- 
demeanor, and shall, upon conviction thereof in any court of the 
United States of competent jurisdiction within the district in which 
such offense was committed, be subject to a fine of not exceeding 
five thousand dollars, or imprisonment in the penitentiary for a 
term of not exceeding two years, or both, in the discretion of the 
court, for each offense. [Similar penalty for the shipper] 

Sec. 13. {As amended June 18, igio.) That any person, firm, 
corporation, company, or association, or any mercantile, agricultural, 
or manufacturing society or other organization, or any body politic 
or municipal organization, or any common carrier, complaining of 
anything done or omitted to be done by any common carrier subject 
to the provisions of this Act, in contravention of the provisions thereof, 
may apply to said Commission by petition, which shall briefly state 
the facts; whereupon a statement of the complaint thus made shall 
be forwarded by the Commission to such common carrier, who shall 
be called upon to satisfy the complaint, or to answer the same in 
writing, within a reasonable time, to be specified by the Commission. 
If such common carrier within the time specified shall make repara- 
tion for the injury alleged to have been done, the common carrier 
shall be relieved of liability to the complainant only for the particular 
violation of law thus complained of. If such carrier or carriers shall not 
satisfy the complaint within the time specified, or there shall appear to 
be any reasonable ground for investigating said complaint, it shall be 
the duty of the Commission to investigate the matters complained 
of in such manner and by such means as it shall deem proper. 



28o MATERIALS FOR ELEMENTARY ECONOMICS 

Said Commission shall, in like manner and with the same authority 
and powers, investigate any complaint forwarded by the railroad 
commissioner or railroad commission of any State or Territory at 
the request of such commissioner or commission, and the Interstate 
Commerce Commission shall have full authority and power at any 
time to institute an inquiry, on its own motion, in any case and as 
to any matter or thing concerning which a complaint is authorized 
to be made, to or before said Commission by any provision of this 
Act, or concerning which any question may arise under any of the 
provisions of this Act, or relating to the enforcement of any of the 
provisions of this Act. And the said Commission shall have the 
same powers and authority to proceed with any inquiry instituted 
on its own motion as though it had been appealed to by complaint 
or petition under any of the provisions of this Act, including the 
power to make and enforce any order or orders in the case, or relating 
to the matter or thing concerning which the inquiry is had excepting 
orders for the payment of money. No complaint shall at any time be 
dismissed because of the absence of direct damage to the complainant. 

Sec. 15. (As amended June 2g, igo6, and June 18, igio.) That 
whenever, after full hearing upon a complaint made as provided in 
section thirteen of this Act, or after full hearing under an order for 
investigation and hearing made by the Commission on its own initia- 
tive (either in extension of any pending complaint or without any 
complaint whatever), the Commission shall be of opinion that any 
individual or joint rates or charges whatsoever demanded, charged, 
or collected by any common carrier or carriers subject to the pro- 
visions of this Act for the transportation of persons or property or 
for the transmission of messages by telegraph or telephone as defined 
in the first section of this Act, or that any individual or joint classifi- 
cations, regulations, or practices whatsoever of such carrier or carriers 
subject to the provisions of this Act are unjust or unreasonable or 
unjustly discriminatory, or unduly preferential or prejudicial or 
otherwise in violation of any of the provisions of this Act, the Com- 
mission is hereby authorized and empowered to determine and pre- 
scribe what will be the just and reasonable individual or joint rate 
or rates, charge or charges, to be thereafter observed in such case 
as the maximum to be charged, and what individual or joint classi- 
fication, regulation, or practice is just, fair, and reasonable, to be 
thereafter followed, and to make an order that the carrier or carriers 
shall cease and desist from such violation to the extent to which the 
Commission finds the same to exist, and shall not thereafter publish, 



MODERN CAPITALISTIC ORGANIZATION 281 

demand, or collect any rate or charge for such transportation or 
transmission in excess of the maximum rate or charge so prescribed, 
and shall adopt the classification and shall conform to and observe 
the regulation or practice so prescribed. All orders of the Com- 
mission, except orders for the payment of money, shall take effect 
within such reasonable time, not less than thirty days, and shall 
continue in force for such period of time, not exceeding two years, 
as shall be prescribed in the order of the Commission, unless the same 
shall be suspended or modified or set aside by the Commission, or be 
suspended or set aside by a court of competent jurisdiction. When- 
ever the carrier or carriers, in obedience to such order of the Com- 
mission or otherwise, in respect to joint rates, fares, or charges, shall 
fail to agree among themselves upon the apportionment or division 
thereof, the Commission may, after hearing, make a supplemental 
order prescribing the just and reasonable proportion of such joint 
rate to be received by each carrier party thereto, which order shall 
take effect as a part of the original order. 

Whenever there shall be filed with the Commission any schedule 
stating a new individual or joint rate, fare, or charge, or any new 
individual or joint classification, or any new individual or joint 
regulation or practice affecting any rate, fare, or charge, the Com-- 
mission shall have, and it is hereby given, authority, either upon 
complaint or upon its own initiative without complaint, at once, 
and if it so orders, without answer or other formal pleading by the 
interested carrier or carriers, but upon reasonable notice, to enter 
upon a hearing concerning the propriety of such rate, fare, charge, 
classification, regulation, or practice; and pending such hearing and 
the decision thereon the Commission upon filing with such schedule 
and delivering to the carrier or carriers affected thereby a statement 
in writing of its reasons for such suspension may suspend the opera- 
tion of such schedule and defer the use of such rate, fare, charge, 
classification, regulation, or practice, but not for a longer period than 
one hundred and twenty days beyond the time when such rate, fare, 
charge, classification, regulation, or practice would otherwise go into 
effect; and after full hearing, whether completed before or after the 
rate, fare, charge, classification, regulation, or practice goes into 
effect, the Commission may make such order in reference to such 
rate, fare, charge, classification, regulation, or practice as would be 
proper in a proceeding initiated after the rate, fare, charge, classifica- 
tion, regulation, or practice had become effective: Provided, That 
if any such hearing can not be concluded within the period of sus- 



282 MATERIALS FOR ELEMENTARY ECONOMICS 

pension, as above stated, the Interstate Commerce Commission may, 
in its discretion, extend the time of suspension for a further period 
not exceeding six months. At any hearing involving a rate increased 
after January first, nineteen hundred and ten, or of a rate sought to 
be increased after the passage of this Act, the burden of proof to 
show that the increased rate or proposed increased rate is just and 
reasonable shall be upon the common carrier, and the Commission 
shall give to the hearing and decision of such questions preference 
over all other questions pending before it and decide the same as 
speedily as possible. 

The Commission may also, after hearing, on a complaint or upon 
its own initiative without complaint, establish through routes and 
joint classifications, and may establish joint rates as the maximum 
to be charged and may prescribe the division of such rates as herein- 
before provided and the terms and conditions under which such 
through routes shall be operated, whenever the carriers themselves 
shall have refused or neglected to establish voluntarily such through 
routes or joint classifications or joint rates; and this provision shall 
apply when one of the connecting carriers is a water line. The 
Commission shall not, however, establish any through route, classi- 
fication, or rate between street electric passenger railways not engaged 
in the general business of transporting freight in addition to their 
passenger and express business and railroads of a different character, 
nor shall the Commission have the right to establish any route, 
classification, rate, fare, or charge when the transportation is wholly 
by water, and any transportation by water affected by this Act 
shall be subject to the laws and regulations applicable to transporta- 
tion by water 

If the owner of property transported under this Act directly or 
indirectly renders any service connected with such transportation, 
or furnishes any instrumentality used therein, the charge and allow- 
ance therefor shall be no more than is just and reasonable, and the 
Commission may, after hearing on a complaint or on its own initia- 
tive, determine what is a reasonable charge as the maximum to be 
paid by the carrier or carriers for the services so rendered or for the 
use of the instrumentality so furnished, and fix the same by appro- 
priate order, which order shall have the same force and effect and be 
enforced in like manner as the orders above provided for under this 

section 

Sec. i6. (Amended March 2, i88g, June 2q, iqo6, and June 18, 
igio.) That if, after hearing on a complaint made as provided in 



MODERN CAPITALISTIC ORGANIZATION 283 

section thirteen of this Act, the Commission shall determine that 
any party complainant is entitled to an award of damages under the 
provisions of this Act for a violation thereof, the Commission shall 
make an order directing the carrier to pay to the complainant the 
sum to which he is entitled on or before a day named 

Sec. 20. (As amended June 2g, igo6, February 2j, igog, and 
June 18, igio.) That the Commission is hereby authorized to 
require annual reports from all common carriers subject to the pro- 
visions of this Act, and from the owners of all railroads engaged in 
interstate commerce as defined in this Act; to prescribe the manner 
in which such reports shall be made, and to require from such carriers 
specific answers to all questions upon which the Commission may need 

information Such reports shall also contain such information 

in relation to rates or regulations concerning fares or freights, or 
agreements, arrangements, or contracts affecting the same as the 
Commission may require; and the Commission may, in its discretion, 
for the purpose of enabling it the better to carry out the purposes of 
this Act, prescribe a period of time within which all common carriers 
subject to the provisions of this Act shall have, as near as may be, 
a uniform system of accounts, and the manner in which such accounts 
shall be kept 

Sec. 24. {Added June 2g, igo6). That the Interstate Commerce 
Commission is hereby enlarged so as to consist of seven members with 
terms of seven years, and each shall receive ten thousand dollars 
compensation annually. The qualifications of the Commissioners and 
the manner of the payment of their salaries shall be as already pro- 
vided by law. Such enlargement of the Commission shall be accom- 
plished through appointment by the President, by and with the advice 
and consent of the Senate, of two additional Interstate Commerce 

Commissioners Not more than four Commissioners shall be 

appointed from the same political party 

{(Commerce Court and other additional provisions in the Act of June 
18, igio.) (Sec. i.) That a court of the United States is hereby 
created which shall be known as the Commerce Court and shall have 
the jurisdiction now possessed by circuit courts of the United States 
and the judges thereof over all cases of the following kinds: 

First. All cases for the enforcement, otherwise than by adjudica- 
tion and collection of a forfeiture or penalty or by infliction of criminal 
punishment, of any order of the Interstate Commerce Commission 
other than for the payment of money. 

Second. Cases brought to enjoin, set aside, annul, or suspend 



284 MATERIALS FOR ELEMENTARY ECONOMICS 

in whole or in part any order of the Interstate Commerce Com- 
mission. 

Third. Such cases as by section three of the Act entitled "An 
Act to further regulate commerce with foreign nations and among 
the States," approved February nineteenth, nineteen hundred and 
three, are authorized to be maintained in a circuit court of the United 
States. 

Fourth. All such mandamus proceedings as under the provisions 
of section twenty or section twenty- three of the Act entitled "An 
Act to regulate commerce," approved February fourth, eighteen 
hundred and eighty-seven, as amended, are authorized to be main- 
tained in a circuit court of the United States. 

Nothing contained in this Act shall be construed as enlarging the 
jurisdiction now possessed by the circuit courts of the United States 
or the judges thereof, that is hereby transferred to and vested in the 
Commerce Court. 

The jurisdiction of the Commerce Court over cases of the fore- 
going classes shall be exclusive; but this Act shall not affect the 
jurisdiction now possessed by any circuit or district court of the 
United States over cases or proceedings of a kind not within the 
above-enumerated classes. 

The Commerce Court shall be a court of record, and shall have a 
seal of such form and style as the court may prescribe. The said 
Court shall be composed of five judges, to be from time to time 
designated and assigned thereto by the Chief Justice of the United 
States, from among the circuit judges of the United States, for the 
period of five years, except that in the first instance the Court shall 
be composed of the five additional circuit judges to be appointed as 
hereinafter provided, who shall be designated by the President to 
serve for one, two, three, four, and five years, respectively, in order 
that the period of designation of one of the said judges shall expire in 
each year thereafter. In case of the death, resignation, or termina- 
tion of assignment of any judge so designated, the Chief Justice shall 
designate a circuit judge to fill the vacancy so caused and to serve 
during the unexpired period for which the original designation was 
made. After the year nineteen hundred and fourteen no circuit 
judge shall be redesignated to serve in the Commerce Court until the 
expiration of at least one year after the expiration of the period of 
his last previous designation. The judge first designated for the 
five-year period shall be the presiding judge of said Court, and there- 
after the judge senior in designation shall be the presiding judge. 



MODERN CAPITALISTIC ORGANIZATION 285 

Each of the judges during the period of his service in the com- 
merce court shall, on account of the regular sessions of the court being 
held in the city of Washington, receive in addition to his salary as 
circuit judge an expense allowance at the rate of one thousand five 
hundred dollars per annum. 

The President shall, by and with the advice and consent of the 
Senate, appoint five additional circuit judges no two of whom shall 
be from the same judicial circuit, who shall hold oflfice during good 
behavior and who shall be from time to time designated and assigned 
by the Chief Justice of the United States for service in the circuit 
court for any district, or the circuit court of appeals for any circuit, 
or in the commerce court 

(Sec. 2.) That a final judgment or decree of the Commerce 
Court may be reviewed by the Supreme Court of the United States 
if appeal to the Supreme Court be taken by an aggrieved party within 
sixty days after the entry of said final judgment or decree. Such 
appeal may be taken in like manner as appeals from a circuit court 
of the United States to the Supreme Court, and the Commerce Court 
may direct the oriiginal record to be transmitted on appeal instead of 
a transcript thereof. The Supreme Court may affirm, reverse, or 
modify the final judgment or decree of the Commerce Court as the 
case may require. 

Appeal to the Supreme Court, however, shall in no case supersede 
or stay the judgment or decree of the Commerce Court appealed from, 
unless the Supreme Court or a justice thereof shall so direct, and 
appellant shall give bond in such form and of such amount as the 
Supreme Court, or the justice of that court allowing the stay, may 
require. 

An appeal may also be taken to the Supreme Court of the United 
States from an interlocutory order or decree of the Commerce Court 
granting or continuing an injunction restraining the enforcement of 
an order of the Interstate Commerce Commission, provided such 
appeal be taken within thirty days from the entry of such order or 
decree. 

Appeals to the Supreme Court under this section shall have 
priority in hearing and determination over all other causes except 
criminal causes in that court 



286 MATERIALS FOR ELEMENTARY ECONOMICS 

8i. RAILWAY RATE THEORIES OF THE INTERSTATE 
COMMERCE COMMISSION' 

The Commission began its work with the idea that value of service 
was the underlying principle of railway rates. It was unable, how- 
ever, to furnish such a precise definition or explanation of this term 
as would enable it to be used as a concrete measure of a reasonable 
rate. 

At the outset of its labors the Commission was not inclined to 
place much confidence in cost of service as a principle for determining 
rates. The feeling that rates fixed in this way would prevent the 
free movement of certain commodities explains in part the attitude 
of the Commissioners, but the main objection has seemed to be the 
practical impossibility of determining the exact cost of transporting 
a particular commodity. That there are obstacles — insuperable 
ones — to any direct determination of the cost of performing a specific 
service in transportation no one familiar with the subject would deny. 
It has not been by means of a direct determination of the costs, 
however, that the Commission has sought a solution. The method 
followed has been that of comparison. The ascertainable costs of 
moving a certain commodity have been compared with the costs of 
moving the same commodity in a different manner or under different 
circumstances. The method of comparative costs does not yield 
absolutely accurate results but it is oftentimes sufiicient for practical 
purposes and we must remember that economics, like law, does not 
concern itself with trifles. 

The method of comparative costs has not always been applicable 
however. In some cases, as we have seen, distance may be used as a 
means of measuring the reasonableness of rates. Considered as the 
sole element in the determination of rates, distance would of course 
yield unsatisfactory results; but it is nevertheless, as the Commission 
says, "in the absence of other influences a controlling element." 
Its value as a measuring instrument lies not in the fact that it is 
independent of costs but that in the absence of other influences it 
reflects costs. 

The same thing may be said of the effort of the Commission to 
preserve for a place its natural advantages of location. A place can 
have no advantage of location which a carrier is bound to respect 

I Adapted from M. B. Hammond, "Railway Rate Theories of the Interstate 
Commerce Commission," in The Quarterly Journal of Economics, XXV, 529-38 
(May, 1911). 



MODERN CAPITALISTIC ORGANIZATION 287 

other than that which is due to its ability to place its products on the 
market at less cost than can its competitors. Rates based on the 
Ijrinciple of recognizing natural advantages of location are therefore 
true to the cost of service principle. 

Even in the absence of these indirect methods of determining 
costs, the Commission has found it possible to reach the same goal 
by other methods. It is a fundamental principle of economics that 
free and untrammeled competition, operating over a long period of 
time, tends to reduce prices to a cost basis. We have therefore only 
to apply this principle to railway rates to see that rates which have 
been fixed by competition, provided that this competition has been 
of a normal sort, will be the same as they would be if all the costs of 
service had been calculated and rates had then been based on costs. 

One other alternative has been presented to the Commission in 
certain cases where it has been unable to calculate the costs of service 
and this, too, has been in accordance with well-known economic 
principles. What the economist always means by cost price is that 
price which covers not only actual expenditures made in production 
but which also leaves a normal rate of return upon all the capital invested. 
In those cases, therefore, in which the Commission has been called 
upon to deal with a whole system of rates; where it would have been 
clearly impossible to have calculated all the costs; where even the 
comparative method was lacking because the increase of rates had 
been made general, and where competition was not present, it has 
still been possible to ask whether these rates have yielded the same 
results, measured by their effect on earning power, as would have 
resulted if the cost of service principle had been applied. 

Two other considerations emphasized by the Commission, value 
of commodity, and sectional or class interests, still remain to be dealt 
with. With reference to the last-named consideration it is hard 
to see how it can be made to fit in with any defensible theory of 
railway rates. Many of the cases in which value of commodity was 
made the basis of the Commission's decision might easily have been 
grouped under the heading of cost of service. This is because differ- 
ences in rates, measured by differences in values of commodities, 
were allowed because the carrier was assumed to have accepted 
greater risks in transporting the more valuable commodities. In 
other cases where low rates were prescribed for low-grade commodities, 
for example such articles as are usually given commodity rates, it is 
obvious that the low rates could have been justified as easily on the 



288 MATERIALS FOR ELEMENTARY ECONOMICS 

principle that the costs of moving these commodities were low as on 
the basis of their low values. 

If the conclusion be accepted that the tendency of the Interstate 
Commerce Commission's decisions is, on the whole, toward a cost 
of service theory of rate-making, there still remains the task of so 
stating a theory of rates as to bring in the various considerations 
which we have seen the Commission has emphasized as factors in 
rate-making, and show how they can be related to the fundamental 
principle. It is perhaps well to say that nowhere has the Commis- 
sion undertaken to state such a comprehensive theory of rate-making. 

1. In any system of government-made or government-regulated 
railway rates, it would seem that this fundamental economic principle 
should be kept in mind: to perform the service of transporting 
persons and goods with the least possible expenditure of social energy. 

2. One transportation route or one transportation system should 
never be allowed to take from another route or system, merely as a 
consequence of competition, trafi&c which the latter route or system 
can carry at less expense. 

3. Rates should be so adjusted as never to take from a place its 
natural geographical advantages of location; but natural advantages 
should not be so construed as to mean monopoly privileges. 

4. Railway rates as a whole should just cover costs as a whole, 
allowing for a normal rate of return on capital actually invested, a 
normal return for labor of all sorts, and for depreciation, but not for 
betterments. This would not mean that superior efficiency in rail- 
way management was not entitled to reap the rewards of its superiority 
in the same way as it does in the ordinary industrial establishment 
where competition rules. On the other hand, the rule must not be 
construed to mean that any investment in a railroad, no matter how 
foolishly or recklessly made, is entitled to exact high rates from persons 
and industries along the line in order to earn current interest rates 
or dividends. Railway property is not more sacred than other 
property, nor are railway investors immune from the consequences 
of their own acts. 

5. Each commodity transported should, as far as possible, be 
made to defray its own share not only of operating and terminal 
costs but also of the fixed costs and dividends. It is possible under 
modern accounting methods to determine these costs with an approxi- 
mate degree of accuracy for the principal commodities and classes 
of traffic. The rates on other commodities may be determined by 



MODERN CAPITALISTIC ORGANIZATION 289 

comparing their ascertainable costs with those of the principal com- 
modities, and to a lesser extent by a comparison of the relative 
values of the commodities. 

6. Differences in distance may be made a test of the reasonable- 
ness of differences in rates where other conditions appear to be similar ; 
yet the general rule must be kept in mind that though the aggregate 
charge should increase as distance increases, the ton-mile rate should 
decrease. 

7. Where the application of none of the above principles seems 
practicable, competition, which has been conducted in a normal 
manner over a period of several years, may be assumed to have 
established a fair relation of rates. 

8. A reasonable rate is one which yields a reasonable compensa- 
tion for the service rendered. If a given rate is reasonable in this 
sense, an increase in the price of the commodity or in the profits to 
the producer will not be a valid excuse for increasing the railway 
rate. The carrier will justly share in the increased prosperity of the 
producer by securing a larger traffic in this commodity. 

The possibility of applying these rules to the business of railway 
transportation is proved by the fact that the application of every 
one of them can be shown by illustrations taken from the Commission's 
decisions. Their consistent application would mean that the rail- 
roads would neither tax the industries of the country nor have their 
own investments sacrificed; they would not build up one place or 
industry at the expense of some other place or industry; they would 
not take from some persons or commodities their proportionate share 
of the costs of transportation and impose them upon other persons 
and commodities; and finally they would not by their system of rate- 
making retard industrial progress or have their own development 
hindered by failing credit or lack of revenue. 

82. VALUATION OF PUBLIC UTILITIES 
I' 

If a railroad corporation has bonded its property for an amount 
that exceeds its fair value, or if its capitahzation is largely fictitious, 
it may not impose upon the public the burden of such increased rates 
as may be required for the purpose of realizing profits upon such 
excessive valuation or fictitious capitalization; and the apparent 

'Smyth vs. Ames, 169 U.S. 466 (1898). 



290 MATERIALS FOR ELEMENTARY ECONOMICS 

value of the property and franchises used by the corporation, as 
represented by its stocks, bonds, and obKgations, is not alone to 
be considered when determining the rates that may be reasonably 
charged 

But it is equally true that the corporation performing such public 
services and the people interested in its business and affairs have 
rights that may not be invaded by legislative enactment in disregard 
of the fundamental guaranties for the protection of property. The 
corporation may not be required to use its property for the benefit of 
the public without receiving just compensation for the services 
rendered by it. How such compensation may be ascertained, and 
what are the necessary elements in such inquiry, will always be an 
embarrassing question 

We hold, however, that the basis of all calculations as to the 
reasonableness of rates to be charged by a corporation maintaining 
a highway under legislative sanction must be the fair value of the 
property being used by it for the convenience of the public. And in 
order to ascertain that value, the original cost of construction, the 
amount expended in permanent improvements, the amount and mar- 
ket value of its bonds and stock, the present as compared with the 
original cost of construction, the probable earning capacity of the 
property under particular rates prescribed by statute, and the sum 
required to meet operating expenses, are all matters for consideration, 
and are to be given such weight as may be just and right in each case. 
We do not say that there may not be other matters to be regarded in 
estimating the value of the property. What the company is entitled 
to ask is a fair return upon the value of that which it employs for the 
public convenience. On the other hand, what the public is entitled 
to demand is that no more be exacted from it for the use of a public 
highway than the services rendered by it are reasonably worth. 

The most important fact to be determined is the value of the 
property. The value to be ascertained is the value at the time of the 
inquiry. Only that property is to be considered which was then 
used and useful in supplying San Francisco with water. Among the 
proper matters to be considered are the original cost of construction; 
the amount expended in permanent improvements; the amount and 
market value of stock and bonds; the present, as compared with 

' Spring Valley Water Works vs. San Francisco, 192 Fed. 137 (1911). 



MODERN CAPITALISTIC ORGANIZATION 291 

original, cost of construction; the probable earning capacity of the 
property under the particular rates prescribed by the ordinance for 
each of the years in question; the sums required to meet operating 
expenses; what it will cost to obtain water, equal in quantity and 
quality to the present supply, from the next most available source; 
the depreciation suffered by that portion of the plant which is worn 
by use or action of the elements, or shorn of its value by newer, 
cheaper, and more efficient appliances and machinery; the fact 
that the plant has a franchise and is a going concern, with an 
established business and thousands of customers, whose buildings 
are connected with the distributing system; and appreciation in 
value since the various properties constituting the plant were acquired. 
To each of these factors just and proper weight must be given ; and 
finally, the result must be the reasonable and fair value of the plant 
as between the company and the public. 

Ill' 

The most important facts on which to base a determination of 
the value of a railroad property are : 

First. The actual cost of construction. 

Second. Cost of reproduction, new. 

Third. The depreciated value. 

Fourth. The amount and market value of stock and bonds 

issued, with a full financial history of the road. 
Fifth. The density of population and traffic. 
Sixth. The nature and permanence of population and traffic. 
Seventh. Facilities for doing business. 
Eighth. Physical characteristics. 
Ninth. The amount of earnings and operating expenses. 

83. SUGGESTIONS FOR EFFECTIVE PUBLIC UTILITY 
REGULATION^ 

The first essential of effective control of public service corpora- 
tions is an efficient administrative body. Experience indicates that 
a board or commission best meets the requirements of the problem. 
The requisite powers are too great to be entrusted to a single person, 

' Statement of J. C. Lawrence, Proceedings of National Association of Railway 
Commissioners, 1910. 

» Adapted from E. H. Downey, "The Regulation of Urban Utilities in Iowa," 
in Applied History, I, 208-27. State Historical Society of Iowa, 191 2. 



292 MATERIALS FOR ELEMENTARY ECONOMICS 

and a large body is too cumbersome for efficiency. A commission of 
three members is probably preferable to a larger board, even if of 
equal individual ability. Moreover, a given sum laid out in salaries 
is more likely to secure competent men if divided among three men 
than if distributed to five. As to the method of selection, appoint- 
ment seems to secure better results than popular election. The term 
of office should not be less than six years, one commissioner being 
appointed every second year. Commissioners should devote their 
entire time to the duties of the office and should have no connection, 
by stock ownership or otherwise, with any public utility. 

With respect to personnel, one commissioner should be an attorney 
skilled in railroad law and should act as the commission's counsel, 
ex officio. Another commissioner should be a public utility expert 
familiar with methods of valuation and accounting. 

Public utility regulation is a scientific matter. If the regulation 
is to be effective, the commission must be composed of high grade 
men, and it must be provided with a staff of rate experts, accountants, 
statisticians, and engineers at least equal to the staff of any public 
service company in the state. 

The act should embrace the following utilities: {a) railroads, 
interurban railroads, express companies, sleeping car, dining car, 
refrigerator car, tank car and other car lines, pipe lines, steamboats, 
and all other carriers between cities; (6) telegraph, telephone, and 
other transmission companies, lines or systems; and (c) street rail- 
ways, telephone exchanges, gas, electric and water works, heating 
and refrigerating plants, terminals, ferries, toll bridges, warehouses, 
elevators, cold storage houses, and any creamery, slaughter-house, 
meat packing establishment, and any milk, coal or ice dealer found 
upon complaint and investigation to possess substantial monopoly 
power. 

The term ''public utility" should be so defined as to embrace 
municipalities and every individual, partnership, firm, corporation, 
association, trustee or receiver owning or operating any of the fore- 
going plants, businesses, or industries, and also any corporation or 
association formed for the purpose of acquiring, or authorized to 
acquire, or which has acquired any utility franchise. This last 
provision, modeled upon the New York law, is intended to reach 
inchoate or inactive companies which acquire franchises and hold 
them until such time as they become valuable. Some of the busi- 
nesses above enumerated are not usually classed as public utilities 



MODERN CAPITALISTIC ORGANIZATION 293 

but it is well known that in many places they are, and tend more 
and more to become, virtual monopolies. The law should be broad 
enough to cover all monopolies and explicit enough to preclude 
evasion by a mere change of form. 

The commission should be required to ascertain, as speedily as 
practicable, the fair value of all utility properties actually devoted 
to the public service and thereafter to keep itself informed of all new 
construction and of the value thereof. No particular theory of 
valuation should be prescribed in the statute, since none now com- 
mands universal assent, but no allowance should be permitted, in 
any valuation for rate-making or for municipal purchase, for any 
franchise, except the compensation actually paid to the public grantor. 
The valuations so found should be conclusive, as of the date when 
made, for the purpose of municipal purchase and also in any subse- 
quent proceeding in any court of the state. This last provision would 
save the vast expense of taking expert testimony in litigation, and it 
would also serve the ends of justice much more nearly than does the 
ordinary court appraisal. 

Uniform accounts, to be prescribed by the commission for each 
class of utilities, should be compulsory. Express provision should 
be made for depreciation accounts and for the maintenance by each 
utility of such depreciation fund as the commission shall deem ade- 
quate to replace the plant and equipment as the same may wear 
out or become obsolete. Both ordinary repairs and renewals are 
properly operating expenses which ought to be met out of earnings 
before dividends are declared or profits computed. Only thus can 
investors be protected without saddling the public with interest 
charges upon vanished capital. Further, by means of the deprecia- 
tion accounts, together with the construction accounts above spoken 
of, continuing valuations will be automatically secured and a sound 
basis established for rate-making. 

To make the accounting requirements effective, the commission 
should be empowered to audit the accounts of any utility and should 
be required to examine and audit the books of municipal plants. 
Municipally operated utilities would greatly profit by such super- 
vision as would compel them to keep intelligible records. Private 
investors, also, would be benefited by trustworthy comparative reports 
of public utilities. 

The commission should have full power, after hearing, to fix the 
exact rates for each class of service. It is not sufiicient to prescribe 



294 MATERIALS FOR ELEMENTARY ECONOMICS 

simply maximum rates. In most cases when any change of rates is 
necessary, justice as between consumers requires revision of the entire 
schedule. To simplify the commission's work and to secure uni- 
formity each utility should be required to publish and file schedules 
showing all rates in force. No change in the schedule should be 
permitted without thirty days' notice to the commission, nor any 
increase over the rates effective at a given date without the com- 
mission's assent. Unlawful discrimination should be defined with 
some particularity, and any departure from the published schedules 
or any greater, less, or different charge to one person than to another 
for a like and contemporaneous service should be expressly prohibited. 
As a further precaution the commission should be authorized to 
cancel discriminatory contracts, even those which antedate the 
passage of the act. Such a power may appear anomalous; but 
there is no good reason for the continuance of an admitted wrong, 
and what is more, discriminatory agreements are unlawful and hence 
ah initio void at common law. 

The commission should have power to prescribe standards of 
products and services, standard units of measurement, standard 
measuring appliances, standard safety equipment, and rules for the 
protection of the health and safety of employees and of the public. 
It should be authorized, after hearing, to require improved service 
or facilities, additions to plant or equipment, and extensions to new 
territory when reasonably necessary to the public service. To make 
these provisions effective, the commission should be required, through 
competent agents and with reasonable frequency, to inspect railway 
tracks, bridges, and equipment, and other utility properties, to test 
the purity, pressure, heat value and illuminating power of gas, the 
voltage of electric currents, the initial efficiency of electric lamps, 
the purity of water, the strength of fire streams, and the adequacy 
of telephone, street railway, and other utiHty service, and to compel, 
upon the reports of its inspectors, and without formal hearings, full 
compliance with standards fixed by law or by the lawful orders of the 
commission. UtiHties should be required to provide standard prov- 
ing apparatus, to prove meters, test service, and keep station records 
according to the rules prescribed by the commission. No utility 
should be allowed to install any gas or water meter until tested, 
approved, and sealed by an official inspector, nor any electric meter 
of a type not approved by the commission. 



MODERN CAPITALISTIC ORGANIZATION 295 

No provisions of a public utilities act are more important or 
require closer attention than those respecting capitalization. Word- 
ing as well as substance needs to be watched with jealous care to 
guard against evasion. Effective control of capitalization must 
embrace at least the following features: 

First. The issue of stocks, bonds, or any form of note or deben- 
ture running more than twelve months, should be permitted only 
for the acquisition of property, new construction, or other purpose 
properly chargeable to capital account — and then only with the 
authorization of the commission and only to the amount and for the 
purposes and upon the terms authorized by the commission, which 
should be further charged with the duty of seeing that such terms and 
conditions are fulfilled. 

Second. No utility should be permitted to issue capital stock at 
less than par, fully paid in cash, or in property at a valuation fixed by 
the commission. The securities of a new or reorganized company 
should be limited to an amount not exceeding in the aggregate the 
structural value of its plant and equipment, the reasonable expenses 
of organization, and the cash actually in hand — all to be ascertained 
and certified by the commission. 

Third. Payment for labor or services in stock or other securities 
and the capitalization of any franchise at more than the compensa- 
tion actually paid to the public grantor thereof, or of "good will" 
at any amount, should be expressly prohibited. To permit the 
promoter or underwriter to receive a block of stock is to encourage 
speculative enterprises and open the door to overcapitalization. 
Legitimate services of organization should be compensated in the 
same way as the work of an engineer or building contractor. " Good 
will" obviously has no application to a monopoly, and a public grant 
should not be made the means of extraordinary profits. 

Fourth. Stock or scrip dividends, shareholders' privileged sub- 
scriptions to stock or bonds, and every other form of "melon cutting" 
should be expressly forbidden. As a preventive, all stock and other 
securities should be offered at public sale. It should, however, be 
provided that a minimum or refusal price may be fixed by the issuing 
corporation, and that the securities may be offered in successive 
blocks or, with the commission's approval, be marketed through 
underwriters. Without such safeguards public sale might depress 
the price of securities below their real value. 



296 MATERIALS FOR ELEMENTARY ECONOMICS 

Mergers, under proper safeguards, ought to be encouraged. The 
amalgamation of competing utiHties avoids much senseless waste. 
There are marked economies also in the joint operation of a telegraph 
and a telephone system, of a street railway and a commercial power 
plant, or of a gas and an electric lighting establishment. It may 
even be advantageous to combine all the utilities of the same com- 
munity. Such a consolidation would effect important savings in 
superintendence and office expenses, in the cost of reading meters 
and making collections, in the purchase of fuel and materials, and 
in the engineering and construction departments. Under such restric- 
tions as will secure to the public a fair share in these economies, the 
consolidation of utilities in the same territory is an advantage to 
consumers as well as owners. 

To protect the public, while permitting legitimate consolidations, 
three restrictions appear to be necessary: 

First, No utility shall sell, assign, convey, lease, mortgage, 
create any lien against, or transfer in any manner whatsoever, its 
franchise, works, plant, or property of any description (except 
materials and supplies disposed of in the ordinary course of business), 
without first obtaining from the commission a certificate of approval, 
to be granted or refused within the discretion of the commission; 
and then only upon terms and conditions approved by the commission. 

Second. No corporation, company, partnership, firm or associa- 
tion shall acquire more than ten per cent of the stock, bonds, or other 
securities of any utility, except with the commission's approval as 
above set forth. 

Third. The securities issued in exchange for any utiHty plant 
or property, or for the stock or bonds thereof, shall not exceed the 
structural value of the property devoted to the public service, the 
"going value" of the business (in which term shall be included only 
the reasonable expenses of organization and the reasonable costs of 
building up the business) and the compensation actually paid to the 
public grantor for its franchise — all to be ascertained and certified 
by the commission. 

In view of the uniform failure of attempts at competition,^ of the 
enormous losses which have been incurred in such attempts, and of 

'"There are few things which the industrial history of advanced nations 
proves more conclusively than that competition in the field of public utilities has 
failed to insure reasonably adequate service at reasonable rates." — B. H. Meyer, 
in American Political Science Review, V, 386, 



MODERN CAPITALISTIC ORGANIZATION 297 

the increases of capitalization and deterioration of service that usually 
have followed upon the abandonment of these experiments, it can 
hardly be doubted that regulated monopoly is the wiser policy. 
None the less, the power to permit competition may well be retained 
as a threat or club to hold monopolists to the faithful performance 
of their public duties. These two objects are probably best secured 
by prohibiting the establishment of any utility in competition with 
one already in existence unless the commission, after notice to all 
parties concerned and a hearing, shall find and certify that public 
convenience and necessity require such additional utility. 

With respect to the granting of franchises, two restrictions appear 
necessary for the protection of investors as well as of the public : 

First. No franchise granted by any municipality or other 
political subdivision of the state should be valid or operative until 
and unless the commission, after hearing, shall find that such franchise 
is necessary and proper for the public convenience and properly 
conserves the public interests; and the commission should be expressly 
empowered to impose such conditions as to construction, equipment 
maintenance, service, or operation as the public interests may require. 
Such a provision, coupled with the referendum requirement would 
go far to do away with corruption in the granting of franchises. 
What is equally important, ''jokers" would have little chance of 
surviving the triple ordeal of the city council, the electorate, and the 
commission. 

Second. The indeterminate permit law of Wisconsin has given 
general satisfaction both to the public and to the utilities affected. 
Under it the companies are assured of their rights in the streets and 
of protection against competition so long as they render reasonably 
satisfactory service at reasonable rates. They have no need to dicker 
with the local authorities for renewals of expiring grants. They are 
relieved from all fear of being forced to sacrifice their property at 
the expiration of any franchise and from all necessity of amortizing 
their investment. The municipalities, for their part, are no longer 
bound by rigid contracts running for definite terms of years. If any 
utility fails to furnish adequate service another company may be 
chartered by the city, with the commission's consent, without regard 
to existing franchises. If any city wishes to operate its own utilities 
it need not wait, as now, for the termination of a grant. 

Municipalities should have power to construct, acquire and 
operate street railways, gas, electric, and water works, ferries, bridges, 



298 MATERIALS FOR ELEMENTARY ECONOMICS 

markets, elevators, warehouses, cold storage houses, commercial 
heating and refrigerating plants, and possibly other urban utilities. 
This list is much longer than the present laws allow; but all the 
enterprises mentioned have been successfully managed by European 
cities, and experiments in municipal operation, under proper safe- 
guards, ought to be encouraged. 

Municipal plants should be subject to the commission's jurisdic- 
tion with respect to accounts, rates, and service to the same extent 
as privately owned utilities. A public undertaking, to be sure, has 
not the same motive as a private monopoly to exploit its patrons. 
But there is considerable danger that private consumers may be 
compelled to pay for service furnished gratis to the city or, on the 
contrary, that rates may be made so low as to not provide for interest, 
upkeep, and depreciation. Wisconsin's experience shows that munici- 
pal utilities are likely to discriminate as between different classes of 
private consumers; and even personal discrimination may be brought 
about by political influence or otherwise. Service, also, is sure to 
be improved by state inspection and the requirement of station 
records. 

Every municipality should have power (i) to determine by 
franchise, contract, ordinance, or otherwise the terms and conditions 
upon which any utility may occupy its streets, alleys, and other 
public places; (2) to exercise continuing police control over poles, 
wires, conduits, tracks, and other structures in, under, over, or along 
such highways or public places, and over all cars or other vehicles 
operated thereon; and (3) to require additions to plant or equipment 
or extensions into new territory. To prevent injustice an appeal 
should lie to the commission which should be empowered to set 
aside any ordinance, contract, or franchise which it might find to 
be unreasonable, unlawful, or prejudicial to the public interest; but 
no utility should be permitted to occupy the highways of, or operate 
within, any municipality without first obtaining the consent of the 
city council and of a majority of the qualified electors voting thereon. 

It is desirable to confine appeals from the commission to the 
courts within somewhat narrow limits, not alone to save litigation 
but to make the intended regulation effective. An administrative 
board constituted like the Railroad Commission of Wisconsin is far 
better fitted than any court in the land to pass upon the reasonable- 
ness of rates, the adequacy of service, or the necessity of additional 
stocks or bonds. The commission is more expert in such matters 



MODERN CAPITALISTIC ORGANIZATION 299 

than any court can ever become; it has much ampler and more 
trustworthy sources of information; it is equally judicious; and it 
is unhampered by that technicality which has ever been the mother 
of the law's delays. There is no merit in the suggestion that the 
final determination of such questions by an administrative board 
would be an arbitrary exercise of power. Final decision must be 
vested somewhere, and may very properly be entrusted to the tribunal 
which is best fitted to exercise it. 

Ideally, then, the commission's findings should be final as to 
facts, including even ultimate conclusions of fact, and should be 
reviewable only on the grounds that the commission has exceeded 
its authority, or that it has not proceeded in accordance with law. 
Reason and analogy support such a limitation of judicial review. 

The courts in the United States are committed, however, to the 
doctrine of judicial control over rate-making. It is not possible, 
therefore, to make the decision of an administrative body conclusive 
as to the reasonableness of rates or of orders affecting property rights. 
The utmost that can be done is to hedge about judicial review upon 
these matters with such safeguards as will serve to make the public 
service commission something more than an advisory body. There 
is no doubt that a state may to the extent permitted by its constitu- 
tion limit the jurisdiction of its own courts; and it appears to be 
settled that when a limited judicial review is permitted by the laws 
of the state parties will be required to exhaust their remedies there 
before applying to the federal courts. 

B. INDUSTRIAL COMBINATIONS 
84. FORMS OF COMBINATION^ 

I. AGREEMENTS ON PRICES AND PRODUCTION 

Although the principle of combination seems to have become 
firmly established in the industrial life of the United States and the 
leading countries of Europe, the forms have varied materially. These 
forms have depended in part upon the business habits of the com- 
munity, the condition of the business, and the commercial laws of the 
various states and countries. The strongest forms of combination 
appear to have been promoted by laws intended to prevent them. 

In all countries the forms of combination which first appeared were 
merely agreements, among competing manufacturers or dealers, with 

' From the Report of the Industrial Commission, XIX, 605-8; I, 21. 



300 MATERIALS FOR ELEMENTARY ECONOMICS 

reference to prices. When competition lowered prices beyond the 
remunerative point, it was a common practice, both in local markets 
and in the wider business field, for competitors to agree that prices 
should not be cut beyond a point named, which would give to all 
parties a fair return. Sometimes, even when no formal agreement is 
reached, the exigencies of trade will lead competitors to establish a 
customary price high enough to enable them to keep in profitable 
business. 

Arrangements among railroads for restricting competition some- 
times amount merely to agreements to maintain rates, and sometimes 
go to the extent of a division of traffic or receipts under a pool. It is 
also well known that our great steel manufacturers generally for a 
number of years have had agreements regarding the prices on steel 
rails, steel billets, and other leading products of a kind manufactured 
by all. 

Closely connected with the agreement as to prices is often found an 
agreement regarding the extent of the output. This is particularly 
true where the market is limited and where the number of producers 
is small, so that by an agreement for the limitation of production, 
prices can be readily regulated. Such an agreement has prevailed 
for many years among the French sugar refiners, and is generally 
known as the French sugar trust. From time to time, usually 
monthly, the half-dozen leading French sugar refiners, producing a 
large percentage of the total of refined sugar, meet, and agree upon the 
quantity which the market seems to demand for the succeeding 
month. Each refiner is allowed his fixed percentage and if he exceeds 
it he is fined. Although agreements of this sort do not regularly 
contain a clause fixing the price of the product, the adaptation of the 
supply to the probable demand determines substantially what the 
price shall be. Sometimes, instead of limiting the product, the 
marketing territory is divided among the producers, each being bound 
not to enter the territory of his former competitors. 

In nearly all countries, as soon as under such agreements business 
begins to be unusually profitable, the temptation for each party to 
extend his sales, by shading the price or entering the territory of his 
rival, becomes so strong that some will secretly break the agreement. 
This often happened in the case of both the whisky and railroad pools 
in this country. Such violation of the contract led invariably to the 
failure of the pool and a method had to be devised to prevent these 
practices. For example, to prevent the breaking of agreements, a 



MODERN CAPITALISTIC ORGANIZATION 301 

forfeit is fixed; and in order that infractions may be discovered, some- 
times each party to the agreement is given access to the books of his 
rivals, but more frequently such examination is left to a small execu- 
tive committee trusted by all. Frequently, to insure the payment of 
a fine imposed, each party to the agreement is required to deposit the 
amoimt of the forfeit, either in cash or in readily negotiable securities, 
in the hands of an executive committee or of third parties. If the 
laws of the country recognize such agreements as legal, this form of 
agreement upon prices and output is likely to become permanent. 
Such is the form which exists, generally, in Germany and Austria. 
The German courts hold such agreements valid. 

II. SELLING BUREAUS 

The failure of agreements as to prices and production, owing to 
disapproval by the courts, has led to other devices. The one most 
common in Europe, and at times found in the United States, has 
been that of the selling bureau. In France and Germany these 
bureaus are ordinarily organized with members from each of the 
establishments entering the arrangement. This bureau takes cogni- 
zance of market conditions, and estimates the amoimt of product 
required to supply the trade; it then allots to each establishment the 
output considered its share, takes all orders for good, fixes prices, 
and manages the entire selling business. Sometimes the different 
establishments are allowed to do more or less independent selling 
imder a rigid system of accounting, with penalties if the rules are 
broken. 

The former Michigan Salt Association in the United States, the 
Comptoir metallurgique de Longwy in France, and the Westphalian 
Coal Syndicate in Germany are striking examples of this kind of 
agreement system. All worked successfully for many years, and the 
last two named are still in operation. The weakness of these forms of 
agreement was found to be in their doubtful legality in some countries. 
They are inefficient, because they do not permit of central manage- 
ment of the manufacturing plants. 

III. THE TRUST 

Feeling the necessity of mOre complete control over its separate 
manufacturing establishments than had been possible under the loose 
agreements of the preceding ten years, the Standard Oil Company 
in 1882 arranged with its associate companies to organize a ''trust," 
with the form and powers previously mentioned. 



302 MATERIALS FOR ELEMENTARY ECONOMICS 

In this form of organization the Standard Oil was followed by the 
whisky trust, the sugar trust, and others. Experience soon showed 
that the trusts were irresponsible bodies, hard to control by the courts. 
There were no laws providing for the organization of such institutions; 
the trustees in various instances did not keep proper records which 
they were ready to produce in court; and the new form of business 
organization at once met with popular and judicial disapproval. In 
1890 the sugar trust was declared illegal in the State of New York, 
under the common law. 

As a consequence, all trusts of this form were soon dissolved and 
the combinations reorganized in a different way. With the exception 
of the Standard Oil Company they became single corporations, and 
combinations since established have regularly taken this form. 

IV. THE CORPORATION FORM 

When it is proposed to consolidate different establishments under 
the corporation form, it has been customary to organize a single new 
corporation to purchase and own the various plants. These plants 
are sometimes paid for in cash; more frequently in the securities of the 
new corporation. When the plants to be combined have been owned 
by corporations, it has been usual to effect an exchange of the stock 
of the new corporation for the stock of the old companies at an agreed 
ratio. The separate corporations may then be dissolved and the 
plants remain in the ownership of the new corporation. 

This was the plan followed by the whisky trust upon its reorganiza- 
tion into the Distilling and Cattle Feeding Company, and by the 
American Sugar Refining Company when it was reorganized. 

If the separate plants have not been owned by corporations, a com- 
mon plan of the later combinations is to first organize the owners 
into the corporate form. A new corporation is then organized, which 
instead of purchasing the properties buys the entire stock, or at least 
a majority interest in the separate companies. The separate corpora- 
tions maintain their existence, and their dividends make up the fund 
from which the dividends of the new corporation are declared. In 
effect, this form of corporation is substantially the same as the old 
trust, but the corporation is organized regularly under the laws of 
some state, and is subject to whatever restrictions the laws of that 
state place upon it, instead of being an irresponsible body, as the 
trust was. This plan of organization has been followed by the 
Federal Steel Company, by the latest reorganization of the Distilling 



MODERN CAPITALISTIC ORGANIZATION 303 

Company of America, by the United States Steel Corporation, 
and others. 

In the management of this form of combination the officers and 
directors of the central company legally appear only as a board of 
stockholders. They cannot, ex ofiicio, direct the action of the oflEicers 
of the constituent companies; they can merely give advice. But as 
they have the power of electing the ofiicers, eventually their advice 
must be followed. 

This form, in which the central corporation owns the stock instead 
of the properties of the separate companies, has a flexibility and con- 
venience in organization and in retaining local brands, good- will, etc., 
not found in corporations owning the plants. 

It will be noted that pools, agreements on prices, etc., leave the 
constituent companies each independent and with diverse interests, 
whereas the trust and the combination, under the two kinds of cor- 
porations mentioned, secure an identity of interests among the sepa- 
rate establishments; if one is weak it is for the interest of all that it 
be made strong or put out of existence. The control is much more 
complete. 

v. THE FACTOR SYSTEM 

Several of the industrial combinations have adopted the plan of 
selling their goods to the wholesalers at a certain fixed price and at 
the same time naming a price at which they were to furnish them to 
the retailers. After an interval of from thirty days to six months, 
provided the wholesaler would make affidavit that he had maintained 
the prices given him, and, sometimes, that he had sold only the goods 
of the combination, he would receive a rebate from the manufacturer. 
From this rebate came his only profits. It has been thought by many 
that this factor system was a means employed by the combination to 
hold its monopolistic control over the wholesaler. 

This system is perhaps best known in connection with rebates on 
sugar, but for a time, while the Distilling and Cattle Feeding Com- 
pany was in existence, a somewhat similar rebate system was employed 
in the sale of spirits. The larger distributers and rectifiers received 
a rebate of 2 cents a gallon, and the wholesalers, after an interval, 
provided they had sold only the goods of the company, received a 
rebate of usually 5 cents a gallon, though the amount of the rebate 
varied somewhat at different times. 

In the case of the whisky combination the company failed to keep 
on hand a sufficient amount of cash to pay these rebates promptly. 



/ 



304 MATERIALS FOR ELEMENTARY ECONOMICS 

and this delay in payment was one of the causes which led to throwing 
this company into the hands of a receiver. 

A similar system is found in the selling of soap, baking powders, 
etc., but the general principles vary in no essential particulars from 
the ones just given. 

85. THE STEEL RAIL POOL OF 1887' 

MEMORANDUM OF AGREEMENT, ENTERED INTO AUGUST 2, 1887, BY 
AND BETWEEN THE NORTH CHICAGO ROLLING MILL COMPANY, THE 
CAMBRIA IRON COMPANY, THE PENNSYLVANIA STEEL COMPANY, 
THE UNION STEEL COMPANY, THE LACKAWANNA IRON & COAL 
COMPANY, THE JOLIET STEEL COMPANY, THE WESTERN STEEL 
COMPANY, THE CLEVELAND ROLLING MILL COMPANY, CARNEGIE 
BROTHERS & CO., LIMITED; CARNEGIE, PHIPPS & CO., LIMITED; 
THE BETHLEHEM IRON COMPANY, THE SCRANTON STEEL COMPANY, 
THE TROY STEEL & IRON COMPANY, THE WORCESTER STEEL WORKS 
AND THE SPRINGFIELD IRON COMPANY. 

We, the before-named companies and corporations, manufac- 
turers of steel rails, hereby mutually agree one with the other, that 
we will restrict our sales and the product of steel rails of 50 pounds to 
the yard and upward, applying to orders taken by us and to be deliv- 
ered by us from our respective works during the year 1888, as herein- 
after allotted and limited; and we respectively bind ourselves not to 
sell in excess of our current allotments, without first obtaining the con- 
sent of the Board of Control thereto — that is to say: 

It is agreed, there shall now be made an allotment of 800,000 
tons of rails, which shall be divided and apportioned to and among the 
several parties hereto to be sold by them during the year 1888, upon 
the following basis of percentages, to wit : North Chicago Rolling Mill 
Company, 125 per cent; Pennsylvania Steel Company, gj% per cent; 
Bethlehem Iron Company, 9 per cent; Carnegie Bros. & Co., Limited, 
and Carnegie, Phipps & Co., Limited (jointly), 13-1% per cent; Joliet 
Steel Company, 8 per cent; Lackawanna Iron & Coal Company, 8 
per cent; Cambria Iron Company, 8 per cent; Scranton Steel Com- 
pany, 8 per cent; the Union Steel Company, 8 per cent; Cleveland 

' From the Report oj the Commissioner of Corporations on the Steel Industry, 
Part I (191 1), pp. 69-71. 

[For an account of another form of monopoUstic agreement see Selection 122, 
on Coffee Valorization. — Editors.] 



MODERN CAPITALISTIC ORGANIZATION 305 

Rolling Mill Company, 4^\ per cent; Troy Steel & Iron Company, 
4^ per cent; Western Steel Company, 4-/^ per cent; Worcester Steel 
Works, ijQ per cent. 

And in addition to the said allotment of 800,000 tons of rails above 
allotted, an additonal allotment of 250,000 tons is hereby made 
and allotted to the Board of Control, to be reallotted and reappor- 
tioned by it, as and to whom it may deem equitable, in the adjustment 
of any differences that may arise. It being also further agreed that all 
subsequent allotments of rails hereafter made, to be sold under this 
agreement during the year 1888, shall also be divided and apportioned 
to the several parties hereto in the same ratio of percentages as said 
apportionment of 800,000 tons is herein divided and apportioned. 

It is further agreed, that the Board of Control shall, from time to 
time, make such further allotments as shall be necessary to at all 
times keep the unsold allotments at least 200,000 tons in excess of the 
total current sales, as shown by the monthly reports of sales. This 
is to be in addition to the then unappropriated part of the 250,000 
tons hereinbefore allotted to the Board of Control to adjust differences. 

It is further agreed, on the first day of April, July, and October, 
the Board of Control are authorized and directed to cancel such part 
of the unmade allotments of the respective parties hereto as they, the 
said Board of Control shall determine such party unable to make in 
due time, and all allotments so cancelled the Board of Control shall 
have the right to reallot to any of the other parties hereto; it being 
understood that all such cancellations shall apply only to allotments 
standing to the credit of the respective parties hereto on the dates 
above named, but no reallotment as aforesaid shall be made by the 
Board of Control to any of the parties hereto for the purpose of 
enabling them, or any of them, to make and sell rails from foreign 
made blooms. 

It is further agreed, that all transfers of parts of allotments 
from one party to another shall be made by the Board of Control. 

It is further agreed, that there shall be a Board of Control, con- 
sisting of three members, namely, Orrin W. Potter, Luther S. Bent, 
and W. W. Thurston, who shall have power to employ a paid secre- 
tary and treasurer. 

It is further agreed, that the Board of Control, upon the written 
consent of 75 per cent of the percentages as hereinbefore named, 
shall increase the allotments for the year 1888, and such increase 
shall be allotted to the parties hereto as hereinbefore provided. 



3o6 MATERIALS FOR ELEMENTARY ECONOMICS 

It is further agreed, that each party whose name is hereunto 
annexed, shall and will make monthly returns to the Board of Control 
of all contracts for delivery of rails of 50 pounds to the yard and up- 
ward during the year 1888, and also of all shipments of such rails 
made by them during said year; a copy of such return shall be fur- 
nished to each party hereto. 

It is further agreed, that all the parties hereto shall and will, on 
or before January 15, 1888, make a written return to the Board of 
Control of all rails of 50 pounds to the yard and upward (designating 
the weight) which they respectively had on hand January i, 1888, 
stating whether the same are sold, and if sold, on what order they 
apply. 

It is further agreed, that the Board of Control shall have the right 
whenever they deem it expedient to convene a meeting of the parties 
hereto, and they shall give at least ten day's previous notice of all 
meetings, and any business transacted at such meetings, and receiv- 
ing 75 per cent of the votes present thereat, either in person or by 
proxy, shall be binding on all the parties hereto, except as to a change 
in percentages as aforesaid. 

The Board of Control shall be required to call a meeting of the 
parties hereto when requested so to do in writing, signed by any three 
of the contracting parties, but such request and such notice shall 
state the object for which such meeting is called. 

It shall be the duty of the Board of Control to have a proper 
record kept of all the returns made to it, with power from time to time 
to change the form of return as they may deem expedient. 

The Board of Control shall have authority to levy an assessment, 
pro rata to the allotted tonnage, to defray the actual expenses made 
necessary to carry out this agreement. 

It is further agreed, that we will, respectively, immediately make 
return to the Board of Control of all rails of 50 pounds to the yard 
and upward which we are now under contract to deliver during the 
year 1888, said return to state to whom such rails are sold and when 
they are to be delivered. 

[Signatures] 



y 



MODERN CAPITALISTIC ORGANIZATION 307 

86. THE CONTINENTAL WALL PAPER COMPANY' 

The contract and agreement is one between 98 per cent of all the 
wall-paper makers in the United States, who co-operate through a 
corporation organized by them for the single purpose of selling their 
gross product. That there shall be no competition between the 
combined companies is insured by the agreement that each manu- 
facturer shall sell his entire product at an agreed price to the plaintiff 
corporation, which is to nominally make all sales, either directly or 
indirectly, at a uniform price, subject to an agreed scale of discounts, 
varying only according to an arbitrary classification of buyers. The 
difference between the price at which the so-called "vendors" sell 
to the plaintiff company and the price exacted from those who buy 
from it will be profit, and the profits will constitute the dividends to 
be distributed to plaintiff's shareholders, and plaintiff's shareholders 
are exclusively composed of the combining companies, called "vend- 
ors"; its comparatively insignificant amount of stock being placed 
with these vendors in proportion to the product of the year before 
the combine took effect. To prevent the enlargement of the product 
of any one of the vendors, it is provided, in effect, that there shall be 
no enlargement of plant, though new machinery may be used to 
replace old or that destroyed. 

To insure a monopoly of the business to themselves, and keep 
strangers out of it, it is alleged, and not denied, that the only two 
manufacturers of wall-paper machinery in the United States became [y 
parties to the combination by agreeing to sell no machinery to stran- 
gers, and to confine their sales to the combine. To add to the pro- 
tective force of the tariff duties tending to keep out foreign products, 
it is also averred that an agreement was made with Canadian paper 
makers to protect each other against any cutting of prices. To insure 
against any kicking out of the agreement or violations in any way, 
each member is required to indorse its shares in the Continental 
Wall Paper Company to that corporation, which is to hold and apply 
the same as liquidated damages in case of any breach. But that 
there should be no inducement to fly the contract, the scheme con- 
templated that every wholesale buyer should engage himself to buy 
his entire supply from the combine; and to secure the engagement of 
each such jobber or wholesaler to the scheme, no paper was to be 
sold to such as did not sign. This made the contract practically 

' From the Continental Wall Paper Co. (plaintiff) v. Lewis Voight &* Sons 
Co., 148 Fed. Rep. 946-48. 



3o8 MATERIALS FOR ELEMENTARY ECONOMICS 

unbreakable, for if a factory should weary of the monopoly, it could 
find no jobbers or wholesalers free to buy its product, and it would be 
driven to rely upon such orders as it could get from retailers or 
consumers. That this union of former competitors — a union embra- 
cing substantially all of the wall-paper mills in the land (for the 2 per 
cent left out may be ignored as an active competition), should result 
in an imreasonable enhancement of prices is precisely what we might 
anticipate. Wall paper is a product of imiversal necessity, and the 
consumers are found in every household. Every principle of eco- 
nomic law instructs us that under such conditions there will be an 
enhancement of price, limited only by the unknown boundary of 
human greed and corporate avarice. It is therefore not to be doubted 
that the averment confessed by the pleading, that prices have been 
advanced 50 per cent, is substantially true. The conspiring mills 
were situated in many states. The consumers embraced the whole 
citizenship of the United States. The jobbers and wholesalers who 
were to be coerced into contracts to buy their entire demands from 
the Continental Wall Paper Company, or be driven out of business, 
were in every state. 

Before the combination, each of the combining companies was 
engaged in both state and interstate commerce. The freedom of 
each, with respect to prices and terms, was restrained by the agree- 
ment and interstate commerce directly affected thereby, as well as 
by the enhancement of prices which resulted. A more complete 
monopoly in an article of universal use has probably never been 
brought about. It may be that the wit of man may yet devise a 
more complete scheme to accomplish the stifling of competition; but 
none of the shifts resorted to for suppressing freedom of commerce 
and securing imdue prices, shown by the reported cases, is half so 
complete in its details. None of the schemes with which this may 
be compared is more certain in its results, more widespread in its 
operation, and more evil in its purposes. 

87. THE AMERICAN TOBACCO COMPANY^ 

The Tobacco Combination had its origin in 1890 in the formation 
of the American Tobacco Company, capitalized at $25,000,000, 
which concern combined the five leading cigarette manufacturers of 
the country and thus obtained control over about 90 per cent of the 

' Adapted from the Report of the Commissioner of Corporations on the Tobacco 
Industry, Part I (1909), pp. 1-13. 



MODERN CAPITALISTIC ORGANIZATION 309 

country's cigarette output. In 1891 it extended its business along 
other lines by acquiring two important smoking-tobacco concerns 
and by entering the plug and cheroot branches of the business. Its 
proportion of the total output in these, however, was small for several 
years. In 1895 several "all-tobacco-cigarette" concerns came under 
its control, which practically established its supremacy in this branch. 
From 1894 to 1897 the company, taking aggressive steps to control 
the plug business of the country, carried on its so-called "plug- 
tobacco war." This resulted late in 1898 in the organization, sub- 
stantially under its control, of the Continental Tobacco Company 
with $62,290,700 of capital stock, almost equally divided between 
preferred and common. The Continental took over the plug busi- 
nesses of a number of leading independent interests and also that of 
the American itself. Early in 1899, moreover, the Continental 
acquired the Liggett & Myers Tobacco Company, the largest and most 
important plug-tobacco concern of the country, increasing its own 
outstanding capital stock at this time to $97,690,700. The Conti- 
nental, by these and subsequent acquisitions, secured substantial 
control of the plug-tobacco business of the country. 

Meantime the American Tobacco Company made numerous acqui- 
sitions of smoking-tobacco concerns, and by the end of 1899 it had 
almost as large a degree of control over this branch as the Continental 
Tobacco Company had acquired over the plug branch. The out- 
standing capitalization of the American was raised in this year from 
$35,000,000 to $68,500,000. 

In 1 90 1 the power of the Combination was further greatly 
increased by the organization of the Consolidated Tobacco Company, 
a holding concern with a capitalization of $30,000,000, later increased / 
to $40,000,000, all paid in in cash. The Consolidated was the means 
of concentrating control within the Combination. It acquired prac- 
tically all of the common stock of the American and Continental 
companies, issuing in exchange therefor $157,378,200 of 4 per cent 
bonds. The organization of this company was planned by leading 
interests in the two older companies. The stockholders were induced 
to exchange their common stock for bonds bearing a fixed rate of 
interest. As a result the greatly increased profits in the business 
from the reduction in the internal-revenue tax soon afterward, which 
increase stockholders generally could not foresee, accrued in large part 
to the advantage of these inside interests as the chief holders of the 
Consolidated's stock. 



3IO MATERIALS FOR ELEMENTARY ECONOMICS 

During the years 1900, 1901, and 1902 the Combination rapidly 
extended its operations. In the first year the American Snuff Com- 
pany was formed with a capitaKzation of $23,001,700. It combined 
the businesses of the Atlantic Snuff Company and of the G. W. Helme 
Company with the snuff business of the American, Continental, and 
Lorillard companies, these three groups together representing at that 
time about 60 per cent of the snuff business of the country. In 1901 
the American Cigar Company was formed with a capital stock of 
$10,000,000 (authorized; $9,965,000 issued), subsequently increased 
to $20,000,000, all outstanding. This company acquired several 
important cigar concerns and combined them with the cigar business 
of the American Tobacco Company. Through the Havana Tobacco 
Company the Combination in 1902 acquired control of the larger 
part of the Cuban cigar and cigarette business. A campaign for the 
control of the tobacco business of Great Britain by the Combination, 
begun in 1901, but only partially successful, led in 1902 to the 
formation of the British- American Tobacco Company, which concern 
now handles the export and foreign business of the Combination. 
Two-thirds of the total outstanding capitalization of this concern, 
£5,820,000 ($28,323,000), is owned by the American Combination 
and the remaining third by a British combination, the Imperial 
Tobacco Company, formed as a result of the American invasion. 

In 1904 the American, Continental, and Consolidated companies 
were merged into the present American Tobacco Company, the 
central concern of the Combination. For the preferred stock of 
the old American and Continental companies, outstanding and in 
the hands of the public, it issued bonds on such a basis as to make the 
return to the holders the same as before. For the bonds of the Con- 
solidated Tobacco Company, aggregating over $157,000,000, it 
issued preferred stock and 4 per cent bonds, and for the stock of the 
Consolidated Tobacco Company it exchanged common stock at 
par. The amounts of securities outstanding at the end of 1904 
were $40,242,400 common stock, $78,689,100 preferred stock, and 
$136,360,600 bonds, a total of $255,292,100; this was decreased to 
$226,764,600 at the close of 1908 through redemption of a portion of 
the bonds. Control of the American Tobacco Company is vested in 
the common stock, which, as shown above, forms only about one-sixth 
of the entire capitalization, but which in recent years (1908-19 10) 
has received nearly one-half the entire earnings as dividends. 

The reorganized American Tobacco Company is both a manu- 



MODERN CAPITALISTIC ORGANIZATION 311 

facturing and a holding company. It produces directly the larger 
part of the Combination's plug and smoking tobacco and domestic 
cigarettes. It controls a large number of subsidiary concerns, 
however, engaged in the same branches of the business, as well as the 
American Snuff Company and the American Cigar Company, which 
conduct, respectively, the snuff and cigar branches of the Com- 
bination's business. 

As a result of the consolidations and acquisitions that have taken 
place, the American Tobacco Company, either directly or through 
its subsidiaries, controlled at the close of 1908 roughly from 75 to 85 
per cent of practically every branch of the domestic business in which 
it is interested, with the exception of cigars, in which its share was 
only about 13 per cent. In the case of snuff its proportion of the 
total was 95.7 per cent. 

The history of the Tobacco Combination thus presented shows 
plainly that the leading purpose of the men who have controlled it 
has been to dominate the tobacco industry. They started out by prac- 
tically monopoUzing the cigarette business. With the great profits 
derived from that source they carried on a strenuous competitive 
fight in the plug industry, which ultimately forced the leading com- 
peting manufacturers into combination with themselves. This 
secured for the Combination a dominant position in the manufacture, 
not only of plug, but of smoking tobacco. Soon after, the combination 
in the snuff industry was brought about, and subsequently a combina- 
tion in the cigar industry. The latter, however, controls only a 
limited proportion of the business. 

The successive combinations which these men have established, 
except that in the cigar business, at the outset took in the leading manu- 
facturers and secured a very large degree of control over the business. 
That degree of control, however, has been further extended by the ac- 
quisition, either by direct purchase or by securing a controlling stock 
interest, of a very large number of other competing concerns. The 
total number of formerly separate concerns and combinations which 
have passed under the control of the Tobacco Combination is in the 
neighborhood of 2 50. This number includes the concerns which origin- 
ally entered the several combinations, but such original acquisitions, 
though in general they were the largest concerns, were much less numer- 
ous than the concerns acquired subsequent to the formation of the com- 
binations. It appears to have been the policy in fact to buy up, from 
time to time, most competitors whose business had become successful. 



312 MATERIALS FOR ELEMENTARY ECONOMICS 

The effect of these later acquisitions is best seen in the increase in 
the proportion of the business controlled. In 1900, shortly after the 
formation of the Continental Tobacco Company, the Tobacco Com- 
bination controlled about 60 per cent of the production of chewing 
and smoking tobacco in the United States. In 1906 it controlled 
81 .8 per cent of the chewing tobacco and 70.6 per cent of the smok- 
ing tobacco. Its proportion of the manufacture of snuff increased 
from 80. 2 per cent in 1901, the first full year of the operation of the 
American Snuff Company, to 96 per cent in 1906. 

A significant feature of many of the acquisitions of the Combi- 
nation, particularly during the period from 1902 to 1904, is the 
fact that they were made secretly and that the American Tobacco 
Company interests, as long as possible, concealed their control, 
continuing to operate the concerns as though independent and often 
using them as a special instrument for attacking the business of 
genuine competitors. 

Aside from concerns engaged in tobacco manufacture, the Ameri- 
can Tobacco Company, and to a less extent the other affiliated 
combinations, have, particularly since 1899, acquired control of 
many concerns engaged in enterprises contributory to tobacco manu- 
facture. Concerns thus brought under the control of the Combination 
include many engaged in the wholesale or retail distribution of 
tobacco products, several producing leaf tobacco in Cuba and Porto 
Rico, a number which make packages and materials, other than 
tobacco, used in tobacco manufacture, several which exploit patents 
for machinery or manufacture machinery for the use of tobacco 
factories, and a few which handle by-products, make smokers' supplies, 
etc. The most important of these contributory enterprises of which 
the Combination has secured control is the manufacture of licorice 
which is a very important material in tobacco manufacture. Through 
the MacAndrews & Forbes Company, which has bought up several 
competing concerns, the American Tobacco Company interests have 
substantially a complete monopoly of the licorice business.^ 

' [A suit to dissolve the American Tobacco Company was started by the United 
States government and in 191 1 the Supreme Court decided in the government's 
favor. It declared that the company was unreasonably restraining interstate 
commerce, contrary to the Anti-Trust Law, and decreed its dissolution. Since 
then the trust has been spUt up into parts and each of the various branches of the 
business distributed to two or more separate companies which are enjoined from 
combining to restrain interstate commerce. — ^^Editors.] 



MODERN CAPITALISTIC ORGANIZATION 313 

88. THE UNITED STATES STEEL CORPORATION^ 

The basic industry of steel making affects the whole people of the 
United States. Its organization is a matter of public concern (not 
merely of private interest), and a great national resource — iron ore — 
lies at the foundation of the business. The Steel Corporation was the 
culmination and the result of a remarkable and even dramatic period 
in the steel industry. Until about 1898 the bulk of the business 
was distributed among a very considerable number of concerns. 
There was sharp competition, modified by frequent pools and price 
agreements of greater or less duration and effectiveness. 

In 1898 began an era of great consolidations, with capitalizations 
ranging from $30,000,000 to $100,000,000, usually mergers of many 
smaller companies. In most of these, as in the earlier price agree- 
ments, the ruling motive was the removal of competition. 

They did not, however, finally eliminate competition. On the con- 
trary, a broad movement at once became apparent which threatened 
competition on a larger scale and probably more severe than any in 
steel history. This was the process known as "integration." 

The situation in 1 899-1 900 was as follows: There were three great 
companies — the Carnegie company, the Federal Steel, and the 
National Steel — dominating the production of crude and semifinished 
steel. This may be called the "primary" group. Six other large 
concerns — the American Steel and Wire, American Tin Plate, Ameri- 
can Steel Hoop, American Sheet Steel, National Tube, and American 
Bridge — severally controlled these lighter finished products. These 
formed the "secondary" group. 

But, large as these concerns were, no one of them was entirely 
self-sufficient. The "secondary" group was dependent on the 
" primary " for its crude steel; the "primary " largely dependent on the 
"secondary" for a market for its products. Few were completely 
"integrated"; that is, few carried through under one control, with the 
accompanying advantages, the entire industrial process from the ore 
to the finished product, linking up ore and coal mines, transportation, 
blast furnaces, steel works, rolling mills, and finished manufacture. 

Immediately, however, came the next step. These great con- 
cerns almost simultaneously began the final linking up of the chain of 
production. Once begun by one concern, others followed in self- 
defense. The " secondary " companies began to reach back, acquiring 

' Adapted from the Report of the Commissioner of Corporations on the Steel 
Industry, Part I (191 1), pp. xvii-xxiv. 



314 MATERIALS FOR ELEMENTARY ECONOMICS 

ore reserves and crude steel plants. For example, in 1900 the Steel 
and Wire Company, whose supply of materials had previously been 
purchased mainly from the Carnegie or the Federal company, planned 
to make its own steel; likewise the National Tube Company. The 
"primary" concerns, finding these their chief customers turning into 
rivals, retaliated by reaching forward to the manufacture of finished 
products. 

Paramount in importance was the ore. The recognition of that 
importance came strangely late, but, once recognized, it became an 
axiom that no large concern could stay in the business unless fortified 
by its own ore reserves. By 1900 the bulk of the lake ores was in the 
hands of less than a dozen companies, with a similar concentration 
in coking coal. 

Such efforts on the part of these great concerns, in striving each 
to "integrate," to make itself wholly independent, threatened to 
result in a great and sudden increase and duplication of the steel pro- 
ducing and finishing capacity of the country, and to involve them 
also in an invasion of each other's business. 

Thus there was suddenly revealed to the industry what the trade 
press at the time called " the impending struggle of the giants," a con- 
test between great concerns who under such circumstances might be 
forced to work out, in rigorous competition, the survival of the fittest. 

Such were the conditions in the steel industry in 1900. The 
spark that lighted the train was the threat of the Carnegie company to 
erect a great tube plant near Cleveland, thus invading the field of 
finished manufacture. 

Steel men and the various associated financial interests regarded 
this situation with much alarm. In such competition they saw a 
great danger to their businesses, especially to the profitable quasi- 
monopolies in certain branches of the trade. In averting it they also 
saw a great opportunity. The extraordinary era of industrial expan- 
sion was still on; the public were still eagerly absorbing large issues of 
securities. By merging these conflicting interests into a great corpora- 
tion, the threatened "steel war" would be averted, and great profits 
realized from the flotation of securities. 

With amazing swiftness, in a few weeks, the United States Steel 
Corporation was thus organized, and began business on April i, 1901. 
Its total capitalization was a little over $1,402,000,000 (including 
bonds). It is strictly a "holding" company — that is, it does not 
mine, manufacture, transport, or sell; it simply owns the stock (as a 



MODERN CAPITALISTIC ORGANIZATION 315 

rule all the stock) of its constituent concerns. Thus competition 
between these concerns was eliminated, while enormous profits were 
made from the flotation of securities, with, also, an unparalleled 
stock commission to the underwriting syndicate, which netted a 
clear profit of about $62,500,000 in cash. 

At its formation the United States Steel Corporation (referred to 
herein as the "Corporation") controlled about two- thirds of the 
country's production of crude steel, and from one-half to four-fifths of 
the principal rolled steel products. It comprised ore, coal, limestone, 
natural gas, railway and steamship companies, blast furnaces, steel 
works, rolling mills, finishing plants, and various other properties. It 
was thus a thoroughly integrated concern, from ore to finished products. 

There remained outside the merger a number of great companies of 
the primary sort, such as Jones & Laughlin, the Pennsylvania, Cam- 
bria, Lackawanna, Republic, and Colorado Fuel and Iron companies, 
and numerous concerns of the secondary type. While overshadowed 
by the Steel Corporation, these included strong, efficient, and growing 
businesses, furnishing a basis for vigorous competition. 

The Steel Corporation is the greatest industrial concern in the 
United States, with the largest properties, and of international impor- 
tance. It is the most conspicuous example of the modern corporate 
organization of great businesses. As such, the relation of its invest- 
ment to its capitalization and to its earning power are matters of 
pubhc concern. 

The corporation was organized with (in round numbers) 510 
millions of preferred stock; 508 millions of common stock; 303 
millions of corporation bonds, and about 81 millions of underlying 
and miscellaneous obligations; a total of over 1,402 million dollars. 

Speaking broadly, such capitalization amounted to the claim, 
the representation, that there was a value in this concern which 
would justify a fair business return on this capitalization. The 
Bureau finds, on the contrary, that in 1901 the fair market value of its 
tangible property was about 700 million dollars, slightly less than one- 
half its capitalization. The other half, the excess of about 700 million 
dollars, is thus separated and stands out, embodying the essential 
public questions raised by the Bureau's analysis of its investment. 
In so far as that excess represented value in 1901, it was value due 
either to increased earning power from elimination of competition; 
concentrated ownership of the basic natural resources, iron ore, and 
coal; or, in some degree, integration efficiency. 



3i6 MATERAILS FOR ELEMENTARY ECONOMICS 

When such values are capitalized into dividend or interest bearing 
securities, they involve important public problems. They are merely 
another name for price policy, and the whole public is ultimately 
concerned in steel prices. 

Increases in property. — Since its formation, the corporation, from 
surplus earnings (allowing for depreciation and changes in securities), 
has made good much of the original excess of its capitalization over 
tangible property. That excess in 1901 was about 700 million dollars, 
or 100 per cent, and in 1910 only about 280 million dollars, or 24 per 
cent. The total tangible value in 1910 was 1,187 million dollars. 
As in 1 901, there is omitted here all the merger values heretofore 
referred to, and all appreciation of natural resources above the 
actual cost thereof to the corporation. 

Profits. — The rate of profit has been calculated, not on the corpora- 
tion's capital stock, but on the total investment as computed by the 
Bureau. Operating, administrative, and general expenses, as well as 
taxes, have been deducted from earnings; also true depreciation, a 
matter of some intricacy. The corporation's allowance for deprecia- 
tion, including mineral exhaustion and obsolescence, has exceeded a 
necessary allowance. The Bureau has carefully determined from the 
records of the corporation the proper depreciation, and has restored 
the excess to profits. 

Thus arrived at, the average rate of profit on actual investment 
from April i, 1901, to December 31, 1910, was 12 per cent. It was 
highest in 1902, 15.9 per cent, and lowest in 1904, 7.6 per cent. 
The yearly rates do not indicate any pronounced tendency, but have 
on the whole slightly decreased. 

It must be remembered, however, that 12 per cent profit for one 
small concern out of many is one thing. Other concerns may make 
much less. It is a very different thing when, as in this case, one-half 
of the whole industry has been maintained on the level of a 12 per 
cent profit. 

It must be made entirely clear that this 12 per cent is the rate of 
profit on the whole investment. Were that part of the investment 
deducted which may be said to be borrowed money, chargeable only 
with a low fixed rate of return, the rate on the remainder, on that 
part which may be considered as put in by the stockholders, would 
be considerably higher. 

Position in the industry. — While in production the Steel Corpora- 
tion from the beginning has overshadowed its principal rivals, and 



MODERN CAPITALISTIC ORGANIZATION 317 

even exceeded all of its competitors combined, its proportion of the 
total has materially diminished in the ten years of its operation. 

In pig-iron production, the corporation has just about maintained 
its original position; in 1901, 43.2 per cent; in 1910, 43.4 per cent. 
But in steel, both crude and finished, it has lost ground; in 1901, 66 
per cent of the steel ingots and castings; in 19 10, only 54 per cent, 
notwithstanding great additions to its capacity. Rolled steel products 
generally show an almost steady loss, especially structural shapes 
and tin plate. Even in rails there has been no gain. 

In short, speaking broadly, as against 60 per cent of all crude and 
finished steel production in 1901, the corporation now has not much 
over 50 per cent, indicating conclusively the continuous presence of 
strong and increasing independent production. The competition of 
these independents with the Steel Corporation so far as prices are 
concerned has been modified by the policy of "co-operation." This 
will be discussed in a later part of the report. 

In efficiency, location of plant, and equipment — in capacity rather 
than actual production — the corporation is materially stronger than 
the foregoing figures indicate, and in case of continued trade depres- 
sion this strength would probably show itself in increased control. 
In ownership of railroads for handling its materials it stands in a class 
by itself. It has a strong but not exceptional position in water trans- 
portation. Its control of the best qualities of coking coal is very strong 
though modified of late by new processes which make other coal more 
or less available for coking purposes. 

Its position in ore reserves, on the other hand, is much stronger than 
in any other factor in the business. It is almost impossible, and would 
be unwise, to attempt any quantitative statement of its proportion 
of the total ore of the country; but of the lake ores, on which the pres- 
ent steel industry is based, it has about 75 per cent, and this advantage 
is materially enhanced by its extensive control of the rail transporta- 
tion of the ore from the mines to the lakes. The so-called Hill 
lease made by the corporation in 1907, with an unprecedentedly high 
rate of royalty and other onerous conditions, is a striking instance 
of the policy of the corporation to maintain a high degree of control 
of ore. This lease covered enormous ore holdings. 

There is much significance, also, in the prevailing custom of 
leasing ore mines imder royalty instead of purchasing outright. This 
system as applied in the lake ore region, without any effective 
restrictions as to size of holdings, plainly facilitates concentration of 



3l8 MATERIALS FOR ELEMENTARY ECONOMICS 

ore property, as it greatly reduces the investment required to control 
large bodies of ore. It has unquestionably had a large influence in 
producing the high concentration of control now existing in lake 
ores, as well as elsewhere. 



89. THE STEEL CORPORATION UNDERWRITING 
AGREEMENT^ 

EXHIBIT I 

An agreement, made this first day of March, nineteen hundred and 
one, by and between United States Steel Corporation, a corporation 
existing under the laws of the State of New Jersey (hereinafter called 
the " Steel Company "), party of the first part, and J. P. Morgan & Co., 
of the city of New York, acting in behalf of a Syndicate, party of 
the second part: 

Whereas, the Steel Company has been organized with a capital 
of $3,000, of which one-half is 7 per cent cumulative preferred stock 
and one-half is common stock, as shown by the certificate of incorpora- 
tion of the Steel Company, recorded in Hudson County, New Jersey, 
on the 25th day of February, 1901, which capital stock is to be in- 
creased as hereinafter provided; and 

Whereas, as hereinafter stated, the board of directors of the Steel 
Company deem it necessary for its business now to acquire the stocks 
and bonds of certain other corporations and also to obtain for its 
corporate purposes a certain sum in cash; and 

Whereas, after careful investigation and appraisement, the board 
of directors of the Steel Company has ascertained, adjudged and 
determined that the value of such bonds and stocks now so to be 
acquired and hereinafter specified, exclusive of such cash sum (which 
cash sum is to be received and treated by the Steel Company as sur- 
plus), is equal at least to the par value of the stock of the Steel Com- 
pany and of the bonds of the Steel Company to be issued therefor; 
and 

Whereas, the board of directors of the Steel Company consider 
that such bonds, stocks and cash may best be obtained by purchase, 
on the terms hereinafter stated, from the Syndicate represented by 

' From the Report of the Commissioner of Corporations on the Steel Industry, 
Parti (191 1), pp. 383-86. 

[For a discussion of the profits of this underwriting operation see Selection 
235. — Editors.] 



MODERN CAPITALISTIC ORGANIZATION 



319 



Messrs. J. P. Morgan & Co., party of the second part hereto, and 
managers of the said Syndicate; and 

Whereas, each of the corporations, the capital stock of which it is 
proposed now to acquire hereunder, has been organized and now is 
existing under the laws of the State of New Jersey, and has outstand- 
ing capital stock divided into shares each of the par value of $100 
(excepting the Carnegie Company, of which the capital stock is 
divided into shares of the par value of $1,000), and divided, also, into 
classes as next hereinafter stated, the said corporations, and the total 
outstanding capital stock and the classes thereof, being as follows, 
to wit: 



Name of Corporation 


Total Outstanding Capital Stock 


Preferred 


Common 


American Sheet Steel Company 


$24,500,000 
14,000,000 
40,000,000 
18,325,000 


$24,500,000 
19,000,000 
50,000,000 
28,000,000 

160 000 000 


American Steel Hoop Company 


American Steel and Wire Company 


American Tin Plate Company 

Carnegie Company 


Federal Steel Company 


53,260,900 
2 7poo,ooo 
40,000,000 


46,484,300 
3 2 poo ,000 
40,000,000 


National Steel Company 


National Tube Company 





And whereas, the Carnegie Company has issued, and there are now 
outstanding, its 5 per cent bonds for-<he aggregate principal sum of 
$160,000,000; and 

Whereas, the Syndicate has arranged for the acquisition of sub- 
stantially all of the bonds and the stock of the Carnegie Company; 
and 

Whereas, in reliance upon this contract the Syndicate is endeavor- 
ing to effect the acquisition, and the delivery of all of the bonds of 
the Carnegie Company, and all of the outstanding shares of the capital 
stock of all of said corporations, upon the terms herein provided. 

Now, therefore, in consideration of the premises and of other good 
and valuable considerations, and of the efforts and expenses which 
both parties recognize will have to be made and incurred by the Syndi- 
cate in their endeavor to consummate such sale: 

First. The Steel Company agrees with J. P. Morgan & Co., act- 
ing in behalf of the Syndicate, as follows: 

(i) If, on or before May 31, 1901, J. P. Morgan & Co., in behalf 
of the Syndicate shall 



320 MATERIALS FOR ELEMENTARY ECONOMICS 

(a) Sell and deliver, or cause to be sold and delivered, to the Steel 
Company, at least fifty-one per cent of such outstanding shares of 
the capital stock of each of the corporations above named, or of such 
of said corporations as finally shall be embraced within the operation 
of this agreement with the approval of the Steel Company, which 
fifty-one per cent of the total outstanding capital stock of each of 
such corporations shall include not less than fifty-one per cent of the 
total outstanding preferred stock, if any, of such company; and also 
all of the $160,000,000 of bonds of the Carnegie Company now 
outstanding, or such lesser amount thereof as shall be tendered by 
J. P. Morgan & Co. ; and 

(b) Shall pay, or shall cause to be paid, to the Steel Company 
twenty-five million dollars in cash: 

(2) The Steel Company will purchase such shares and bonds, and, 
in payment and consideration for such stock and bonds and for such 
cash, will issue to such persons as J. P. Morgan & Co., in behalf of 
the Syndicate, shall indicate, shares of its preferred stock and shares 
of its common stock (all of which shall be fully paid and non-assess- 
able), and also its five per cent gold bonds (which bonds shall be of 
such form and tenor, and shall be secured, as J. P. Morgan & Co. 
may determine), as follows: 

(a) In the event that the Steel Company shall acquire all the 
shares of the capital stock of all of such other corporations and all 
such bonds of the Carnegie Company, the Steel Company will issue 
for all such stock, and such bonds, and such sum in cash, four million 
two hundred and forty-nine thousand nine hundred and eighty-five 
shares of its preferred stock, and four million two hundred and forty- 
nine thousand nine hundred and eighty -five shares of its common 
stock, and also three hundred and four million dollars of its said five 
per cent gold bonds. 

(b) In the event that the Steel Company shall not acquire all the 
shares of the capital stock of all of such other corporations and all 
such bonds of the Carnegie Company, the Steel Company will issue 
for the shares of stock and the bonds which shall be acquired, and said 
sum in cash, four million two hundred and forty-nine thousand nine 
hundred and eighty-five (4,249,985) shares of its preferred stock, 
and four million two hundred and forty -nine thousand nine hundred 
and eighty-five (4,249,985) shares of its common stock and three 
hundred and four million dollars ($304,000,000) of its 5 per cent gold 
bonds, less abatement and deduction therefrom to be made as follows : 



MODERN CAPITALISTIC ORGANIZATION 



321 



For each $100 par value of stock of such other companies men- 
tioned in the following table, which shall not be acquired by the Steel 
Company, the amount of the preferred stock and common stock or 
either, set opposite to such class of stock in said table shall be deducted 
and abated. 



Name of Company and Class of Stock 


Amount of Stock to be Deducted 
IN Par Value 




Preferred Stock 


Common Stock 


Carnegie Company 


$150.00 

110.00 
4.00 

117.50 

125.00 
8.80 

125.00 

125.00 
20.00 

100.00 
100.00 


$150.00 


Federal Steel Co.: 

Preferred stock 


Common stock 


107.50 


American Steel and Wire Co. of N.J.: 

Preferred stock 


Common stock 


102.50 


National Tube Co.: 

Preferred stock 


Common stock 


125.00 


National Steel Co.: 

Preferred stock 


Common stock 


125.00 


American Tin Plate Co.: 

Preferred stock 


Common stock 


125.00 


American Steel Hoop Co.: 

Preferred stock 


Common stock 


100.00 


American Sheet Steel Co.: 

Preferred stock 




Common stock 


100.00 







For each $1,000 par value of such bonds of the Carnegie Company 
that shall not be acquired by the Steel Company $1,000 par value of 
such bonds of the Steel Company shall be abated and deducted. 

Second. The Steel Company further agrees that in the event of 
the acquisition by it pursuant to this agreement of less than the total 
issue of said bonds of the Carnegie Company or less than the total 
outstanding capital stock of each of said corporations, the Steel Com- 
pany frorti time to time will purchase from such persons as shall be 
indicated by J. P. Morgan & Co., any and all additional outstanding 
bonds of the Carnegie Company or shares of the capital stock of any 
of said corporations that shall be tendered to the Steel Company 
prior to May i, 1902; and in payment therefor will issue and deliver 
its bonds and fully paid-up shares of its preferred stock and fully 
paid-up shares of its common stock, at the rates at which deduction 



322 MATERIALS FOR ELEMENTARY ECONOMICS 

and abatement shall have been made under Article First hereof in 
respect of the additional bonds and shares of stock so purchased. 

Third. The Steel Company shall credit and allow to J. P. Morgan 
& Co. on account of the cash sum payable under Article First hereof, 
or shall pay to J. P. Morgan & Co. a sum equal to the aggregate 
amount which, prior to April i, 1901, shall have accrued upon any 
installments of dividends accruing, but not matured, on any such 
preferred stock at the date of delivery thereof to the Steel Company. 

The Steel Company further agrees that the dividends on all the 
preferred stock of the Steel Company to be issued by it hereunder, 
shall begin to accrue from April i, 1901. 

Fourth. The Steel Company, without prejudice to the further 
exercise of its chartered rights to increase or to decrease its capital 
stock, agrees that it will lawfully increase its authorized capital stock 
to an amount sufficient to enable it to issue and to deliver its preferred 
stock and its common stock to the aggregate amount hereinbefore 
provided. 

Fifth. J. P. Morgan & Co., in behalf of the Syndicate, will bear 
and will pay the statutory fees and taxes for the proposed increase of 
the capital stock of the Steel Company. 

Sixth. This agreement, and any agreement in pursuance thereof, 
is and shall be strictly inter partes; and no stockholder of any of the 
corporations above referred to shall be deemed to have any right 
hereunder. 

In witness whereof, these presents have been duly executed by the 
parties hereto the day and year first above written. 

United States Steel Corporation, 

[l.s.] By W. J. Curtis, President. 

Attest: 

Charles MacVeagh, 

Secretary, J. P. Morgan b° Co. 



MODERN CAPITALISTIC ORGANIZATION 



323 



90. COMPANIES WHOSE STOCKS WERE ACQUIRED BY UNITED 
STATES STEEL CORPORATION AT OR SHORTLY AFTER 
ITS ORGANIZATION IN 1901, AND THE PRINCIPAL SUB- 
COMPANIES OR PROPERTIES OF THESE CONSTITUENT 
COMPANIES' 

[See reference notes on p. 327.] 

(The subsidiary companies or properties of the constituent concerns here given are those held 
by them on April i, 1901. They may differ from those originally acquired by such constituent con- 
cerns, first, because some of the properties originally acquired by them were dismantled or abandoned, 
and, second, because the constituent concerns, as indicated on this table, organized some of these 
subsidiaries, and acquired additional properties. Moreover, a number of the plants given in this 
table were dismantled or abandoned immediately after the formation of the Steel Corporation. Such 
plants are indicated in italics. Most of the subsidiaries of the main constituent concerns were owned 
in fee in 1901. Those still held by stock ownership in 1901 are indicated by an asterisk.] 

r. COMPANIES MAKING CHIEFLY CRtTDE AND SEMIFINISHED STEEL OR THE HEAVIER 
FINISHED STEEL PRODUCTS 

Carnegie Company of New Jersey 



Carnegie Steel Company of Pennsylvania, 

owning — 
Edgar Thomson Works, Bessemer, Pa. 
Duquesne Works, Duquesne, Pa. 
Homestead Works, Munhall, Pa. 
Upper and Lower Union Mills, Pittsburg, 

Pa. 
Carrie Blast Furnaces, Rankin, Pa. 
Lucy Blast Furnaces, Pittsburg, Pa. 
Howard Axle Works, Howard, Pa. 

• Pennsylvania and Lake Erie Dock Company 

(43.6 per cent). 

• New York, Pennsylvania, and Ohio Dock Com- 

pany (25 per cent). 

• Carnegie Land Company. 

• Conneaut Land Company. 

• Oliver Iron Mining Company (83J per cent) — 

Owning a large number of active and in- 
active iron-ore properties on the Michigan 
and Mesabi Ranges, acquired from various 
independent mining companies. 

Federal Steel Company 



* Pewabic Company (50 per cent). 

* Pittsburg, Bessemer, and Lake Erie Railroad 
Company (52 per cent). 

* Union Railroad Company. 

* Pittsburg Steamship Company (83J per cent). 

* Pittsburg and Conneaut Dock Company. 

* Pittsburg Limestone Company, Ltd. (75 per 
cent). 

* Carnegie Natural Gas Company. 

* Youghiogheny Northern Railway. 

* Mount Pleasant Water Company. 

* Youghiogheny Water Company. 

* Trotter Water Company. 

* Mingo Coal Company. 

* Union Supply Company. 

* H. C. Frick Coke Company — 
Holding by direct ownership or through sub- 
sidiary companies about 40,000 acres of 
coking-coal land; 11,000 coke ovens; 
3,500 dwellings, and other property. 



' Illinois Steel Company — 
South Chicago Works. 
North Chicago Works. 
Milwaukee Works. 
Union Works. 
Joliet Works. 

* Southwest Connellsville Coke Company. 

* Chicago, Lake Shore, and Eastern Railway 

Company. 

* Cundy Iron Company. 

* Mount Pleasant Supply Company. 
Minnesota Iron Company — 

Owning various ore mines and undeveloped 
mineral lands in Minnesota. 

* Duluth and Iron Range Railroad Company. 

* Minnesota Steamship Company. 



• Minnesota Dock Company (55 per cent). 

* Lorain Steel Company (Ohio) — 

Steel plant at Lorain, Ohio. 

* Lorain Steel Company of Pennsylvania — 

Steel Plant at Johnstown, Pa. 

(Formerly owned by the Johnson Com- 
pany.) 

* Ingleside Coal Company. 

* Johnstown and Stony Creek Railroad Com- 

pany. 

* Lake Terminal Railroad Company. 
•Elgin, Joliet, and Eastern Railway Company, 

* Eureka Fuel Company.' 

* Masontown and New Salem Railroad Com- 

pany.' 

* Huron Water Company (50 per cent).' 



' From the Report of the Commissioner of Corporations on the Steel Industry 
Part I (1911), p. 107. 

[Compare with this statement Selection 68: "The Holding Company" — 
Editors.] 



324 



MATERIALS FOR ELEMENTARY ECONOMICS 



National Steel Company 



• Ohio Steel Company, Youngstown, Ohio — 

* Biwabik Mine (25 per cent). 
King, Gilbert & Warner Company, Columbus, 
Ohio— 
* Columbus Stone Company, Columbus, 
Ohio (66§ per cent). 
Shenango Valley Steel Company, New Castle, 
Pa. 

• Bellaire Steel Company, Bellaire, Ohio. 

• Aetna Standard Iron and Steel Company, 

Mingo Junction, Ohio.' 
Buhl Steel Company, Sharon, Pa. 



Sharon Iron Company, Ltd., Sharon, Pa. 
Thomas Furnace Company, Niles, Ohio. 

* Ohio Iron Company, Zanesville, Ohio. 

* Rosena Furnace Company, New Castle, Pa. 
'National Mining Company (33J per cent).» 

* Chapin Mining Company. 

* Winthrop Iron Company. 

* Standard Connellsville Coke Company, Pleas- 

ant Unity, Pa. 

* Continental Coke Company, Uniontown, Pa. 

* Mutual Transportation Company. 

* Menominee Transit Company. 



II. COMPANIES MAKING MORE HIGHLY ELABORATED PRODUCTS 

American Steel and Wire Company of New Jersey 



American Steel and Wire Company of Illinois — 

Consolidated Steel and Wire Company (a 
consolidation, with 6 plants in 1901). 

Salem Wire Nail Company, Salem and 
Findlay, Ohio. 

H. P. Nail Company, Cleveland, Ohio. 

American Wire Company, Cleveland, Ohio. 

American Wire Nail Company, Anderson, 
Ind. 

I. L. EUwood Manufacturing Company, De 
Kalb, 111. 

Ellwood Wire and Nail Company, De Kalb, 
111. 
Washburn & Moen Manufacturing Company 

(4 plants). 
Worcester Wire Company, Worcester, Mass. 
Cleveland Rolling Mill Company, Cleveland 

and Newburg, Ohio. 
Oliver Wire Company, Pittsburg, Pa. 
Oliver & Snyder Steel Company, Pittsburg, Pa. 
Pittsburg Wire Company, Braddock, Pa. 
Indiana Wire Fence Company, Crawfordsville, 

Ind. 
Garden City Wire and Spring Company, 

Chicago, III. 



Consolidated Barb Wire Company, Joliet, III, 
and Lawrence, Kan. 

Laidlaw Bale Tie Company, Joliet, 111. 

Cincinnati Barb Wire Fence Company, Cin- 
cinnati, Ohio. 

Union Rolling Mill Company, Cleveland, Ohio. 

Portage Iron Company, Duncansville, Pa. 

Newburgh Wire and Nail Company, Newburgh, 
N.Y. 

Allegheny Furnace Company, Allegheny, Pa. 

Shenango Valley Steel Company, New Castle, 
Pa. 

Shoenberger Steel Company, Pittsburg, Pa. 

Puget Sound Wire Nail and Steel Company, 
Everett, Wash. 

* American Mining Company .< 

* American Coke Company.'' 

* Juniata Coke Company, Dawson, Pa. (50 per 

cent). 

* American Steamship Company.* 

* Edgar Zinc Company, St. Louis, Mo., and 

Cherryvale, Kan. (80 per cent). 

* Pennsylvania and Lake Erie Dock Company 

(19 per cent). 

* Huron Water Company (50 per cent).* 



National Tube Company 



' National Tube Works Company, McKeesport 

and Pittsburg, Pa. 
Riverside Iron Works, Wheeling and Benwood, 

W.Va., and Steubenville, Ohio. 
Pennsylvania Tube Company, Pittsburg, Pa. 
Oil City Tube Company, Oil City, Pa. 
National Galvanizing Works, Versailles, Pa. 
Syracuse Tube Company, Syracuse, N.Y. 
Delaware Iron Company, New Castle, Del. 
Allison Manufacturing Company, Philadelphia 

Pa. 



Cohoes Tube Works, Cohoes, N.Y. 

Ohio Tube Company, Warren, Ohio, and 
Norristown, Pa. 

American Tube and Iron Company, Middle- 
town, Pa., and Youngstown, Ohio. 

Chester Pipe and Tube Company, Chester, Pa. 

Oil Well Supply Company, Pittsburg, Pa. 

* Western Tube Company, Kewanee, III. 

* Pittsburg Tube Company, Pittsburg, Pa. 

* Pennsylvania and Lake Erie Dock Company 

(7 per cent). 



MODERN CAPITALISTIC ORGANIZATION 



325 



Shelby Steel Tube Company of New Jersey 



Shelby Steel Tube Company of Pennsylvania — 
Shelby Steel Tube Company of Ohio — 

Garwood Seamless Tube Company, Gar- 
wood, N.J. 

Ellwood Weldless Tube Company, Ell- 
wood City, Pa. 

Greenville Tube Company, Greenville, 
Pa. 

American Weldless Tube Company, 
Toledo, Ohio. 

Brewer Tube Company, Toledo, Ohio. 



Mansfield Machine Works, Mansfield, 

Ohio. 
United States Cold Drawn Steel Company, 

Cuyahoga Falls, Ohio. 
Shelby Steel Tube Company, Shelby, 
Ohio. 
New Castle Tube Company, New Castle, Pa. 
Albany Manufacturing Company, Albany, 

Ind. 
Auburn Bolt and Nut Works, Auburn, Pa. 
Pope Tube Company, Hartford, Conn. 



American Tin Plate Company 



American Tin Plate Company, El wood and 
Monlpelier, Ind. 
• New Castle Sheet and Tin Plate Company, 
New Castle, Pa. 

Shenango Valley Steel Company, New Castle, 
Pa.' 

Monongahela Tin Plate Company, Pittsburg, 
Pa. 

United States Iron and Tin Plate Manufac- 
turing Company, McKeesport, Pa. 

National Tin Plate Company, Monessen, Pa., 
and Anderson, Ind. 

Pittsburg Tin Plate Works, New Kensington, 
Pa. 

Pennsylvania Tin Plate Company, New 
Kensington, Pa. 

Star Tin Plate Company, Pittsburg, Pa. 

Humbert Tin Plate Company, Connellsville, 
Pa. 

Washington Steel and Tin Plate Mills, Wash- 
ington, Pa. 

Crescent Sheet and Tin Plate Company, Cleve- 
land, Ohio. 

Falcon Tin Plate and Sheet Company, Niles, 
Ohio. 

Beaver Tin Plate Company, Lisbon, Ohio. 

Irondale Steel and Iron Company, Middleton, 
Ind. 

La Belle Iron Works, Wheeling, W.Va.' 

Wallace, Banfield & Co., Irondale, Ohio. 

Aetna Standard Iron and Steel Company, 
Bridgeport, Ohio.' 



Atlanta Steel and Tin Plate Company, At- 
lanta, Ind. 

Baltimore Tin Plate Company, Baltimore, Md. 

Blairsville Rolling Mill and Tin Plate Mill, 
Blairsville, Pa. 

Cincinnati Rolling Mill and Tin Plate Com- 
pany, Cincinnati, Ohio. 

Great Western Tin Plate Company, Joliet, 111. 

Ellwood Tin Plate Company, Ellwood City, 
Pa. 

Johnstown Tin Plate Company, Johnstown, 
Pa. 

Laughlin Nail Company, Martins Ferry, Ohio. 

Morewood Company, Gas City, Ind. 

Neshannock Sheet and Tin Plate Company, 
New Castle, Pa. 

Ohio River Sheet and Tin Plate Company, 
Rochester, Pa. 

Hamilton &• Co., West Newton, Pa. 

Marshall Bros. &• Co., Philadelphia, Pa. 

Britton Rolling Mill Company, Cleveland, 
Ohio.' 

Canonsburg Iron and Steel Company, Canons- 
burg, Pa. 

* National Mining Company (,ii\ per cent).' 
Morton Tin Plate Company, Cambridge, Ohio. 
Cumberland Steel and Tin Plate Company, 

Cumberland, Md. 

* Champion Iron and Steel Company, Muske- 

gon, Mich. 
Reeves Iron Company, Canal Dover, Ohio. 



American Sheet Steel Company 



Cambridge Iron and Steel Company, Cam- 
bridge, Ohio. 

Cambridge Manufacturing Company, Cam- 
bridge, Ohio. 

Canton Rolling Mill Company, Canton, Ohio. 

Corning Steel Company, Hammond, Ind. 



Dennison Rolling Mill Company, Dennison, 

Ohio. 
Dresden Iron and Steel Sheet Company, 

Dresden, Ohio. 
Falcon Iron and Nail Company, Niles, Ohio. 
P. H. Laufman &• Co., Ltd., Paulton, Pa. 



326 



MATERIALS FOR ELEMENTARY ECONOMICS 



Saltsburg Rolling Mill Company, Saltsburg, 

Pa. 
Midland Steel Company, Muncie, Ind. 
Old Meadow Rolling Mill Company, Scott- 
dale, Pa. 
Piqua Rolling Mill Company, Piqua, Ohio. 
Cincinnati Corrugated Company, Piqua, 

Ohio. 
Struthers Iron and Steel Company, Struthers, 

Ohio. 
Pittsburg Steel Manufacturing Company, 

Shousetown, Ohio. 
West Penn Sheet Steel Works, Leechburg, Pa. 
Chester Rolling Mill Company, Chester, 

W.Va. 
Hyde Park Iron and Steel Company, Hyde 

Park, Pa. 
Kirkpatrick & Co., Ltd., Leechburg, Pa. 



Chartiers Iron and Steel Company, Carnegie, 

Pa. 
Scottdale Iron and Steel Company, Ltd., 

Scottdale, Pa. 
New Philadelphia Iron and Steel Company, 

New Philadelphia, Ohio. 
Reeves Iron Company, Canal Dover, Ohio. 
Aetna Standard Iron and Steel Company, 

Bridgeport, Ohio.' 
Apollo Iron and Steel Company, Apollo and 

Vandergrift, Pa. — 

* Apollo Gas Company. 

* W. Dewees Wood Company, McKeesport, Pa., 
and Wellsville, Ohio — 

* Versailles Fuel Gas Company. 

* McKeesport Terminal Railroad Company. 
Coshocton Rolling Mill Company, Coshocton, 

Ohio. 



Amerkan Steel Hoop Company 



• Isabella Furnace Company, Pittsburg, Pa. 
William Clark & Sons, Pittsburg, Pa. 
Lindsay & McCutcheon, Pittsburg, Pa. 
J. Painter & Sons, Pittsburg, Pa. 
Monessen Steel Company, Monessen, Pa. 
Union Iron and Steel Company, Youngstown, 

Warren, and Girard, Ohio. 
Pomeroy Iron and Steel Company, Pomeroy, 

Ohio. 
Portage Iron Company, Ltd., Duncansville, 

Pa. 



P. L. Kimberly & Co., Greenville znd Sharon, 
Pa. 

* Mahoning Ore and Steel Company (zo per 

cent). 

* National Mining Company (33I per cent).' 

* Union Ore Company (50 per cent). 

* Pennsylvania and Lake Erie Dock Company 

(8 J per cent). 

* Etna and Montrose Railroad Company. 



American Bridge Company 



American Bridge Works, Chicago, HI. 

Berlin Iron Bridge Company, East Berlin, 

Conn. 
Buffalo Bridge and Iron Works, Buffalo, N.Y. 
Carnegie Steel Company, Limited (Keystone 

Bridge Company, bridge and structural 

plant), Pittsburg, Pa. 

* Detroit Bridge and Iron Works, Detroit, Mich. 
Edge Moor Bridge Works, Wilmington, Del. 
Elmira Bridge Company, Elmira, N.Y. 
Gillette-Herzog Manufacturing Company, 

Minneapolis, Minn. 
Groton Bridge and Manufacturing Company, 

Groton, N.Y. 
Hilton Bridge Construction Company, Albany, 

N.Y. 
Horseheads Bridge Company, Horseheads, 

N.Y. 

* Koken Iron Works, St. Louis, Mo. 
LaFayette Bridge Company, LaFayette, Ind. 
Lassig Bridge and Iron Works, Chicago, 111. 
Nelson & Buchanan Company, Chambersburg, 

Pa.s 



New Columbus Bridge Company, Columbus, 

Ohio. 
Pittsburg Bridge Company, Pittsburg, Pa. 
Post & McCord, Brooklyn, N.Y. 
Rochester Bridge and Iron Works, Rochester, 

N.Y. 
Schultz Bridge and Iron Company, Pittsburg, 

Pa. 
ShiflBer Bridge Company, Pittsburg, Pa. 
Union Bridge Company, Athens, Pa. 
J. G. Wagner Company (bridge and structural 

plant), Milwaukee, Wis. 
Wrought Iron Bridge Company, Canton, Ohio, 
Youngstown Bridge Company, Youngstown, 

Ohio. 

* A. & P. Roberts Company, known as Pencoyd 

Bridge Works, Pencoyd, Pa. 

* Toledo Bridge Company, Toledo, Ohio. 

* Alabama Bridge and Iron Company, Decatur, 

Ala. 

* New Jersey Steel and Iron Company, Trenton, 

N.J. 



MODERN CAPITALISTIC ORGANIZATION 327 

III. MISCELLANEOUS 

Lake Superior Consolidated Iron Mines 

Owning various important iron mines and Also owning the stock of Duluth, Missabe 

properties in the Lake Superior region, con- and Northern Railway Company, 

trolling several hundred million tons of ore. 

Bessemer Steamship Company 

Owning a fleet of 25 steamers and 31 barges. 



• Indicates stock ownership in 1901. 

' Organized by and in interest of Federal Steel Company. It may also be noted that, except 
as to the Illinois Steel Company's manufacturing plants, most of the various subsidiaries of the constitu- 
ent concerns of the Federal Steel Company were directly organized by them and not acquired from 
other interests. 

' Acquired blast furnaces and steel works only. (See note 6.) 

» National Mining Company was promoted and organized in interest of National Steel Company, 
American Steel Hoop Company, and American Tin Plate Company. 

< Promoted and organized in interest of American Steel and Wire Company of New Jersey after 
its organization. 

» Acquired machinery and equipment only. 

' Acquired tin-plate machinery and equipment only. A part of the property of this company 
was acquired by other constituent concerns. Such a division of plants was made in several other 
instances. 

' Acquired sheet-mill machinery and equipment only. 



91. AN EXAMPLE OF TRUST EFFICIENCY' 

The International Harvester Co., generally speaking, has an ad- 
vantage over independent manufacturers with respect to the cost of 
production of its machines. This is especially marked in the case of 
grain binders, the most important of the harvesting machines. Thus, 
the average factory cost of binders for the International Harvester 
Co. at its domestic plants for the two years, 1910 and 1911 combined, 
was $56 .32, and ranged from $54 . 11 to $73 . 78 at the different plants. 
While the company produces most of the iron and steel required — on 
which its subsidiary steel company makes a very large profit — the 
cost of these materials to its implement plants is based on prevailing 
market prices, so that its costs in this respect are comparable with 
those of the independent producers. For the four independent com- 
panies that reported to the Bureau the cost of their binders, the 
average factory cost for the same period as computed from the data 
reported by them was $70.38. There was a wide range of cost 
among the four independent concerns, but only two of them showed 

' Adapted from the Report of the Commissioner of Corporations on the Inter- 
national Harvester Co. (1913), pp. 26-28. 



328 MATERIALS FOR ELEMENTARY ECONOMICS 

a materially lower cost than the highest cost of the International 
Harvester Co. While differences in the style of construction of differ- 
ent makes of binders undoubtedly explain some of these differences in 
the cost, the chief reasons therefor were differences in economy of 
production, in which the International Harvester Co. has a large 
advantage in its great volume of output, at least at its McCormick and 
Deering plants. The output at these plants, however, was equally 
large before the merger. 

These figures of factory costs do not take account of general and 
miscellaneous expenses, nor of a much heavier selling expense which 
for binders sometimes amounts to $20 . 00 or even $25 . 00 per machine. 
General and miscellaneous expenditures were relatively much heavier 
for the independent companies than for the International Harvester 
Co., chiefly on account of great differences in volume of business, 
though possibly due also to differences in methods of keeping cost 
accounts. They may properly be grouped with manufacturing 
costs for the purpose of this comparison. If these expenditures are 
prorated over the cost of production, both for the International 
Harvester Co. and the independents, the average cost of binders for 
the International Harvester Co. becomes $58.57, and for the four 
independents $76. 18. 

A proper understanding of these relations of cost of production to 
the competitive position of the independent binder manufacturers, 
requires consideration also of the question of selling expense. The 
selling expense per binder for the International Harvester Co. is 
considerably higher than the average selling expense of the independ- 
ents, and this fact partly compensates the latter for their higher 
average costs of production. Nevertheless the margin of profit 
between prices and cost of production and selling expense combined 
is markedly lower for the independents than for the International 
Harvester Co. Apparently the relatively high selling expense of the 
International Harvester Co. is due to the policy of maintaining a 
very elaborate selling organization, which gives it a strong hold on the 
trade and helps to secure to it a large volume of business. It appears 
to be the company's policy thus to maintain an expensive selling organ- 
ization to push the sale of its goods rather than reduce prices on some 
of its most important lines, particularly harvesting machines. 

Similarly in the case of mowers and rakes, for which the Bureau 
had sufficient data for comparing the costs of the International 
Harvester Co. with those of independent^, it was found that the 



MODERN CAPITALISTIC ORGANIZATION 329 

average cost of manufacture at the plants of the International 
Harvester Co. for the years 19 10 and 191 1 combined was lower than 
the average cost of the independents reporting. Prorating general 
and miscellaneous expense over the factory cost of these machines 
the advantage of the International Harvester Co. in this respect over 
the independents was even greater. 

Again for some of the newer lines, data secured by the Bureau 
indicated some advantage for the International Harvester Co. in 
cost of production, but the data were not sufficient to be conclusive. 

The foregoing comparisons of production costs indicate one of 
the most important advantages enjoyed by the International Har- 
vester Co. The striking advantage it has with respect to cost of pro- 
duction of binders, taken in connection with the great importance of 
this machine in the farm-implement trade, is one of its chief elements 
of power. 

92. TRUST ADVANTAGES, DISADVANTAGES, AND REMEDIES' 

I. ADVANTAGES 

Those who advocate the formation of large industrial combina- 
tions claim that they possess, over the system of production on a 
smaller scale by competing plants, the following advantages: 

I. Concentration. — By closing individual plants less favorably 
located or less well equipped and concentrating production into the 
best plants most favorably located a great saving can be effected, 
both in the amount of capital necessary for the production of a given 
product and the amount of labor required. 

Another advantage of the concentration of industry is that the 
plants which are kept employed can be run at their full capacity 
instead of at part capacity, and can largely be run continuously 
instead of intermittently, so far as the combination happens to control 
the larger part of the entire output — a material source of saving in 
certain lines of industry. A still further advantage of this concen- 
tration comes in the selling of the product, from the fact that custom- 
ers, being always sure of ready supply whenever it is wanted, more 
willingly buy from the large producer, and that there is less loss from 
bad debts. This readiness to buy from trusts, however, is denied, 
some witnesses holding that dealers prefer to buy from independent 
producers. 

■ From the "Review of Evidence" in the Report of the Industrial Commission 
(1900), I, 32-38. 



330 MATERIALS FOR ELEMENTARY ECONOMICS 

In certain lines of industry much greater economy can be prac- 
ticed, especially in the way of using by-products to better advantage 
in a large establishment than in a small one. Much difference of 
opinion exists among witnesses in most lines of industry as to the 
size of plant that can secure the most economical division of labor 
and use of by-products, without making adequate supervision too 
difl&cult. 

2. Freights. — Where the product is bulky, so that the freight forms 
an essential element of the cost, much can be saved by an organiza- 
tion which has plants established at favorable locations in different 
sections of the coimtry so that purchasers can be supplied from 
nearest plants, thus saving the cross freights, which, of course, must 
be paid where customers are supplied from single competing plants. 

3. Patents and brands. — Where different establishments, selHng 
separate brands, are brought together into one combination, the use 
of each brand being made common to all, a great saving is often 
effected, since the most successful can be more efficiently exploited. 

The control also of substantially all patents in one line of industry 
sometimes enables the combination to secure a monopoly which it 
could not otherwise secure. 

4. Single management. — The great completeness and simplicity 
of the operation of a single great corporation or trust is also a source 
of saving. Where each of the different establishments which are 
united had before a president, a complete set of officers, and a separate 
office force, the combined establishment need have but its one set of 
chief officers, and subordinates at lesser salaries may take the places 
of the heads of separate establishments. In this way a material 
saving is often made in the salaries of the higher officials; while a 
considerable Teduction of the total office force is also possible. It is 
likewise true that this same form of organization enables one set of 
traveling salesmen to sell all of the brands or all classes of goods for 
the separate establishments, and in that way much labor is saved. 
This is considered a great saving from the standpoint of the producer 
and consumer, but is likewise naturally considered an evil from the 
point of view of those who are thus thrown out of work. 

The more complete organizations also will distribute the work 
among the different plants in such a way that to each is given the 
particular kind of product for which it is specially adapted, and in 
many cases changes in machinery and changes of workmen from one 
kind of product to another are avoided, a source often of great saving. 



MODERN CAPITALISTIC ORGANIZATION 331 

5. Skilled management. — The bringing into co-operation of leading 
men from the separate establishments, each having different elements 
of skill and experience, makes it possible to apply to the business the 
aggregate ability of all, a factor in many instances doubtless of great 
advantage. To some degree there may be a finer specialization of 
business abiUty, each man being placed at the head of the department 
for which he is specially fitted, thus giving, of course, the most 
skilled management possible to the entire industry, whereas before 
the combination was effected only a comparatively few of the leading 
establishments would have managers of equal skill. 

But this advantage, some think, is limited. The chief managers 
at the central office are likely to be large stockholders, and thus to 
have a strong direct interest in the success of the enterprise. This 
may hold also of many of the superintendents of departments. But 
others will be hired managers, and, it is claimed, a hired superintend- 
ent will not take the same interest in the establishment or be able 
to exert the same inteUigent control as the owner of a comparatively 
small establishment. Moreover, minute supervision cannot well be 
exercised in a very large combination. 

6. Export trade. — The control of large capital also, it is asserted, 
enables the export trade to be developed to much greater advantage 
than could be done by smaller establishments with less wealth at 
their disposal. 

II. DISADVANTAGES 

Among the evils of the great combinations those most frequently 
mentioned are: 

1. Employees discharged. — When different establishments come 
together into one, it is often the case that certain classes of employees 
are needed in much less numbers than by the independent plants. 
This is specially true in the case of commercial travelers, and, also, 
perhaps in the case of superintendents and clerks in the offices. 
While this is generally admitted, it is considered by many to be an 
inevitable condition of progress and only a temporary hardship which, 
like that resulting from the introduction of a new machine, will 
ultimately result in a greater gain. 

2. Methods of competition. — The large establishments, by cutting 
prices in certain localities, while maintaining the prices in the main, 
have a decided advantage over the smaller competitors whose market 
is limited to the one field in which the prices are cut, and consequently 
can often succeed in driving their rivals out of the business. 



332 MATERIALS FOR ELEMENTARY ECONOMICS 

Connected with this method of competition is also the use of unfair 
methods, such as following up rivals' customers, bribing employees 
of rivals to furnish information, etc. 

The sudden raising and lowering of prices by the combinations, 
without notice and apparently arbitrarily to embarrass their oppo- 
nents, is also considered a great evil. 

3. Increased prices. — When the combinations have sufficient 
strength, or for any reason get monopolistic control more or less 
complete, it is thought that they often raise prices above competitive 
rates, to the great detriment of the public. 

4. Speculation and overcapitalization. — Another evil often charged 
against these newer combinations is that the promoter, by virtue of 
misrepresentations or by the concealment of material facts, is fre- 
quently able to secure very large profits for himself at the expense of 
the people at large who buy the stocks, and that in this way undue 
speculation is encouraged. 

Connected with this evil which comes with the modern method of 
promotion is that of overcapitalization. Stock is frequently issued 
to four or five, or even more, times the amount of the cash value of 
the plants that are brought into the combinations. These stocks then 
placed upon the market go into the hands of persons ignorant of 
the real value of the property, who afterward are likely to lose 
heavily. Pools are sometimes made to control the stock market, or 
other of the common ways of disposing of the stock by unfair methods 
are employed. 

At times also the officers and directors of the large combinations 
seem to have taken advantage of their inside knowledge of the business 
to speculate on the stock exchange in their own securities to the 
great detriment of the other shareholders. 

5. Freight discriminations. — Among the chief evils mentioned 
are those of freight discriminations in favor of the large companies, 
which many assert are the chief cause for the growth of the great 
combinations. 

6. Monopoly; its social effects. — The fact that an organization 
possesses a practical monopoly and can in that way direct its opera- 
tions at the expense of its rivals, thereby preventing competitors 
from coming into the field, it is thought, takes away from the individ- 
ual initiative of business men and prevents particularly the younger 
men from going into business independently. The formerly inde- 



MODERN CAPITALISTIC ORGANIZATION 333 

pendent heads of establishments entering the combinations are also, 
it is said, reduced to the position of hired subordinates. By these 
means, witnesses claim, the trusts are in reality sapping the courage 
and power of initiative of perhaps the most active and influential 
men in the community. This evil is denied by many of the members 
of the large corporations, who think that within those corporations 
are found opportunities for the exercise of judgment and enterprise 
and for rising in life which do not exist outside. 

III. REMEDIES 

1. Let-alone policy. — Several of the witnesses are of the opinion 
that any evils connected with the industrial combinations will be 
remedied in the ordinary course of business, and that any attempt 
at regulation by law would be likely to result in more harm than good. 
Competition, either active or potential, is believed by these witnesses 
to be a sufficient preventive of monopoly and extortionate prices, 
while stockholders and investors are believed to be already sufficiently 
protected by statute and common law, especially in view of the fact 
that the state cannot guarantee to these persons immunity from 
carelessness and ignorance on their own part. It is also urged that, 
under the common law alone, the courts have always held as illegal 
any monopoly or combination distinctly shown to be in restraint of 
trade. 

While making this general expression of opinion, some of these 
witnesses afterward admitted that certain measures tending toward 
giving the public, and particularly the stockholders, more informa- 
tion regarding the nature of the business might be advisable. 

2. Direct suppression of monopolistic combinations. — A few wit- 
nesses are inclined to favor the more general enactment of statutes 
along the lines of those already adopted by numerous states, idirectly 
prohibiting the transaction of business by combinations seeking to 
restrain trade or to control prices. Some witnesses believe that the 
present statutes, in regard to the states where they have been enacted, 
in conjunction with the national antitrust law of 1890, and the 
interstate commerce law, would, if vigorously enforced, be all the 
legislation necessary. 

Perhaps a greater number of witnesses, however, directly expressed 
themselves as opposed to so-called "antitrust" legislation, while 
others distinctly imply a similar opposition. These witnesses, includ- 



y 



334 MATERIALS FOR ELEMENTARY ECONOMICS 

ing some opponents of individual combinations, as well as lawyers, 
hold that combination is a natural outgrowth of modern conditions, 
and that it is practically impossible to suppress it. If any legislation 
is needed, it should be in the form of regulation and publicity only. 

3. Prohibition of destructive competition. — Two or three witnesses 
testifying in opposition to the Standard Oil Company advocate 
legislation to prohibit "destructive competition." The witnesses 
have in mind especially the cutting of prices in local markets, while 
retaining them at high figures in other parts of the country. A 
requirement that, freight rates being considered, prices should be 
made uniform in all markets is advocated. It is also suggested that 
general cutting of prices below actual cost of production for the pur- 
pose of driving out competitors should, perhaps, be prohibited. No 
criticism upon these suggestions is offered directly by other witnesses. 
In connection with this Senator Lee advocated limiting capitalization. 

4. Publicity. — Many of the witnesses, including even representa- 
tives of combinations, are of the opinion that a much greater publicity 
regarding the afifairs of such combinations than is now customary 
would tend to remove many of the evils. As regards the general 
public, the knowledge thus secured would avail to prevent the main- 
tenance of extortionate prices as well as unfair methods and condi- 
tions of competition. Stockholders and investors would also be 
protected against abuses by promoters and officers of corporations. 

How this publicity should be brought about and the degree to 
which it should extend is a matter upon which no general agreement 
existed among the witnesses. Some are inclined to think that it 
would be wise if somewhat detailed balance sheets of the accounts of 
the larger combinations could be made public. More of the witnesses, 
including especially lawyers and officers of corporations, seem rather 
of the opinion that when the corporation is first organized the details 
regarding its organization, the values at which plants and other 
property are taken in, the profits of the promoters, etc., should be 
made pubhc. After the corporation has been engaged in business, 
however, while the details of its management should be made known 
with considerable fullness to the stockholders, the outside public 
should be given little more information than at present, lest thereby 
competitors may secure an advantage. 

Many of the witnesses believe that publicity, if properly estab- 
lished and enforced, would prove a very efficient remedy. Others 
think that, while it might be useful, it would not alone be sufficient. 



MODERN CAPITALISTIC ORGANIZATION 335 

At least one of the witnesses is of the opinion that this publicity 
should be enforced upon all public corporations, such as railways, 
street railways, etc., but not upon ordinary manufacturing or 
mercantile corporations. 

Strong differences of opinion exist among the different witnesses 
as to whether legislation along any of the lines suggested, or additional 
legislation, should be by the individual states or by the federal 
government. The witnesses also disagree as to the constitutionality 
of various forms of legislation, both in the case of the states and in 
the case of the federal government. Some witnesses were of the 
opinion that state legislation would be of little service unless prac- 
tically all of the states adopted uniform laws, and this is considered 
an impossibility. Others seem to think that legislation, even by a 
few of the states, if of the right kind, would be very useful. There 
is perhaps, however, a rather general expression of opinion among 
those who favor any legislation at all that federal legislation, if con- 
stitutional, is desirable, at least to supplement state legislation as to 
combinations, if not, perhaps, to take entire jurisdiction regarding 
them. 

5. State legislation. — The chief specific suggestions regarding 
state legislation were: 

(a) The classification of corporations should be made much 
stricter than at present, and each class should be confined closely to 
the exercise of its specified powers. 

{h) There should be strict inspection of corporations by state 
officials, and publicity should be enforced through reports. This, 
of course, applies primarily to action by the states as regards their 
own domestic corporations. 

(c) Combinations, in whatever form (even if it be that of a single 
corporation), between different corporations, where monopolistic 
intent can be shown, should be prohibited. 

{d) Foreign corporations should be forbidden by each state to do 
business within its borders unless conforming to its laws. As to this 
last suggestion, the powers of states over foreign corporations, so far 
as their interstate business is concerned, would be very limited. It 
appears that the courts would be likely to hold that the states would 
require a special authorization from Congress to enable them to 
act with any considerable effectiveness in this regard, even if the 
power could be secured in that way. 

6. Federal legislation. — The lines of federal legislation suggested 
fall mainly under the following heads: 



336 MATERIALS FOR ELEMENTARY ECONOMICS 

(a) Creation of federal corporations under strict federal laws. 
Some would favor incorporation under federal laws only in case of 
very large corporations, while from the legal standpoint some others 
would fix the distinction between state and federal corporations 
along the line of commerce within the states as distinguished from 
interstate commerce. The representatives of combinations favoring 
such federal laws consider that one of their chief advantages would 
be to prevent unwarranted interference with the business of the cor- 
porations by individual states. Some of the witnesses, however, 
consider that the creation of federal corporations would be harmful 
as well as unconstitutional. 

(b) In connection with federal incorporation, or apart from it, 
certain witnesses favor a considerable degree of regulation of corpora- 
tions on the part of the federal government. In this connection, 
publicity, through reports and inspection, is advocated. A Bureau 
of Industry is suggested by one witness, having powers somewhat 
similar to those of the Interstate Commerce Commission. The 
reports to be made to this body should be of such a nature as to dis- 
close the condition of the business of the corporation, especially as to 
whether it possessed or was likely to acquire a monopoly or not. 

(c) Strengthen Interstate Commerce Commission. — Some of the 
witnesses complain of the inefl&ciency of the Interstate Commerce 
Commission. Others urge that it be given greater power, even 
judicial power, and that pooling among railroads be permitted under 
its supervision. Especially is it recommended in the testimony 
taken before the subcommission on transportation that its hands be 
strengthened by giving it power of audit of railway accounts, power 
of enforcing its decisions, etc., it being urged that in this way freight 
discriminations in favor of the large shippers, the combinations, 
could be prevented. 

(d) Two witnesses are inclined to the opinion that unless Congress 
in some way assumes full control of corporations the United States 
Government should remove, by specific act of Congress, the limita- 
tions which now are likely to be laid by the courts, on the basis of 
the federal constitution, upon the powers of the states over monopo- 
listic combinations, so far as their interstate business is concerned. 
It was thought, on the whole, that such an act of Congress would 
probably be upheld as constitutional by the courts. 

(e) Removal or lowering of tariff. — Several of the witnesses, though 
not objecting in the main to the principle of a protective tariff, were 



MODERN CAPITALISTIC ORGANIZATION 337 

of the opinion that in some cases the tariff encouraged, or, even as 
one said, was the chief cause of the trust. In such cases they thought 
it should be lowered or abolished. Mr. Havemeyer expressed him- 
self most strongly in favor of a low horizontal tariff of not over 10 
per cent, while Mr. Buynitsky proposed that if there were shown to be 
a monopoly in any protected industry the president might be em- 
powered to lower the tariff on the products of that industry, by 
executive order, not more than 20 per cent, nor for a longer period 
than five years. 

(/) Powers of Congress. — Much discussion was presented before 
the Commission as to the constitutional powers of Congress to enact 
legislation along any of the lines above suggested. It is admitted 
that Congress has exclusive control over interstate commerce, and 
the preponderance of opinion seems to be that it has power to create 
corporations to carry on such commerce, although this is disputed. 
Congress is admitted to have no power over purely manufacturing 
corporations not engaged in interstate business. There is much 
doubt, however, as to the precise line where business ceases to be 
domestic and becomes interstate. Professor Huffcut, at least, is 
inclined to think that the courts, even under the present constitution, 
would uphold quite general control over the general business of corpo- 
rations carrying on a widespread business among the several states, 
on the ground that a large portion, at least, of that business — perhaps 
most of it — is interstate in character. The control of that would 
practically control all. In this connection this witness suggests that 
Congress could probably constitutionally compel such large corpora- 
tions to submit to federal legislation, and perhaps to incorporate 
under federal laws, by one of the three following methods: 

a) By forbidding the use of the mails to state corporations 
engaged in interstate commerce, especially so far as they are shown 
to be monopolistic and therefore subject to the police power. 

h) By levying a practically prohibitive tax upon state corpora- 
tions engaged in interstate commerce, as has been done with note 
issues of state banks. Other witnesses suggest that the Government 
can acquire jurisdiction, in order to compel reports and publicity, 
by imposing taxes, and some are inclined to suggest that these taxes 
should be made progressive. 

c) By directly prohibiting state corporations from engaging in 
interstate commerce. 



338 MATERIALS FOR ELEMENTARY ECONOMICS 

93. THE SHERMAN ANTI-TRUST ACT^ 

§ I . Every contract, combination in the form of trust or otherwise, 
or conspiracy, in restraint of trade or commerce among the several 
states, or with foreign nations, is hereby declared to be illegal. Every 
person who shall make any such contract, or engage in any such com- 
bination or conspiracy, shall be deemed guilty of a misdemeanor, and, 
on conviction thereof, shall be punished by fine not exceeding five 
thousand dollars, or by imprisonment not exceeding one year, or by 
both said punishments, in the discretion of the court. 

§ 2. Every person who shall monopolize, or attempt to monopolize, 
or combine or conspire with any other person or persons to monopolize, 
any part of the trade or commerce among the several states, or with 
foreign nations, shall be deemed guilty of a misdemeanor, and, on con- 
viction thereof, shall be punished by fine not exceeding five thousand 
dollars, or by imprisonment not exceeding one year, or by both said 
punishments, in the discretion of the court. 

§ 3. Every contract, combination in form of trust or otherwise, or 
conspiracy, in restraint of trade or commerce in any territory of the 
United States or of the District of Columbia, or in restraint of trade or 
commerce between any such territory and another, or between any 
such territory or territories and any state or states or the District of 
Columbia, or with foreign nations, or between the District of Colum- 
bia and any state or states or foreign nations, is hereby declared 
illegal. Every person who shall make any such contract or engage in 
any such combination or conspiracy shall be deemed guilty of a mis- 
demeanor, and, on conviction thereof, shall be punished by fine not 
exceeding five thousand dollars, or by imprisonment not exceeding 
one year, or by both said punishments, in the discretion of the court. 

§ 4. The several circuit courts of the United States are hereby 
invested with jurisdiction to prevent and restrain violations of this 
act; and it shall be the duty of the several district attorneys of the 
United States, in their respective districts, under the direction of the 
Attorney-General, to institute proceedings in equity to prevent and 
restrain such violations. Such proceedings may be by way of petition 
setting forth the case and praying that such violation shall be enjoined 
or otherwise prohibited. When the parties complained of shall have 
been duly notified of such petition the court shall proceed, as soon as 
maybe, to the hearing and determination of the case; and, pending 

^ 26 U.S. Statutes 209. 



MODERN CAPITALISTIC ORGANIZATION 339 

such petition, and before final decree, the court may at any time make 
such temporary restraining order or prohibition as shall be deemed 
just in the premises. 

§ 5. Whenever it shall appear to the court before which any pro- 
ceeding under section four of this act may be pending, that the ends 
of justice require that other parties should be brought before the 
court, the court may cause them to be summoned, whether they reside 
in the district in which the court is held or not; and subpoenas to 
that end may be served in any district by the marshal thereof. 

§ 6. Any property owned under any contract or by any combina- 
tion, or pursuant to any conspiracy (and being the subject thereof) 
mentioned in section one of this act, and being in the course of trans- 
portation from one state to another, or to a foreign country, shall be 
forfeited to the United States, and may be seized and condemned by 
like proceedings as those provided by law for the forfeiture, seizure, 
and condemnation of property imported into the United States con- 
trary to law. 

§ 7. Any person who shall be injured in his business or property 
by any other person or corporation by reason of anything forbidden or 
declared to be unlawful by this act may sue therefor in any circuit 
court of the United States in the district in which the defendant resides 
or is found, without respect to the amount in controversy, and shall 
recover threefold the damages by him sustained, and the costs of suit, 
including a reasonable attorney's fee. 

§ 8. That the word "person" or "persons," wherever used in this 
act, shall be deemed to include corporations and associations existing 
under or authorized by the laws of either the United States, the laws 
of any of the territories, the laws of any state, or the laws of any foreign 
country. 



VIII. MARKETS AND TRADING 

94. METHODS OF MARKETING' 

I. METHODS OF SALE 

In the early stages of our industrial history, sales were made 
in bulk. The purchaser saw the actual goods before the sale was 
made. 

Later, sale by sample appeared. The purchaser bought goods 
represented to be identical with the sample he was shown. The intro- 
duction of this method of sale was necessitated by the widening of the 
market and was made possible by improvement in commercial ethics 
and by increasing standardization of the product. The purchaser 
must have confidence not only in the honest intention of the producer 
to furnish goods identical with the sample, but also in his ability to 
produce identical goods. Hence, increasing uniformity in product 
through machine methods of manufacture was a factor in the increase 
of sale by sample. 

Sale by description is the most modern development in distri- 
bution. An even higher ethical standard is required than for sale by 
sample. Moreover, sale by description requires a higher level of 
general intelligence than sale in bulk or sale by sample. Sale by 
description in its modern development is, in a sense, a by-product of 
the printing press. 

All three methods of sale are in use in modern commercial life. 
The consumer still purchases a large part of the commodities which he 
uses under a system of sale in bulk. He sees the goods before he buys 
them. The middleman, buying in larger quantities, generally pur- 
chases from sample. But sale by description becomes each year of 
increasing importance at every stage in the system of distribution. 
Even where the purchaser actually sees a sample or the goods them- 
selves before the sale is concluded, the method of sale by description 
has in many cases previously been used to create in him a demand for 
the commodity. 

'Adapted from A. W. Shaw, "Some Problems in Market Distribution," 
Quarterly Journal of Economics, XXVI, 721-51 (August, 191 2). 

[See also Selection 102, for a discussion of "Advertising and Demand" by 
the same author — Editors.] 

340 



MARKETS AND TRADING 341 

II. AVAILABLE AGENCIES FOR SELLING 

As selling is the initial step in distribution, it is necessary to con- 
sider the agencies for selling available to the merchant-producer. 
There are three general agencies to be considered. These are (i) 
middlemen, (2) the producer's own salesman, and (3) advertising, 
direct and general. The business man faces the problem of what 
agency or what combination of agencies is the most efficient machinery 
for the distribution of his particular commodity. 

The method of sale adopted will largely govern the choice of agency 
to be employed. If the sale is to be in bulk, the purchaser seeing the 
actual goods before the purchase is made, distribution through a series 
of middlemen is generally most feasible. However, such sale in bulk 
through the producer's own salesmen is possible in some cases. Small 
household appliances are often sold in this manner by door-to-door 
salesmen. 

If sale by sample is the general method adapted to the commodity 
in question, middlemen or salesmen will often be the more desirable 
agencies. Many commodities are distributed through middlemen, 
the sale at each stage in the process being by sample save for the final 
stage from retailer to consumer, where the sale is in bulk. Direct 
salesmen, perhaps in the majority of cases, sell from sample. And 
even selling by direct advertising alone is in some cases adapted to a 
method of sale by sample. Thus the distributer by mail of a com- 
modity which is not bulky may enclose in his direct advertising 
material a sample of the commodity. 

Where sale by description is used exclusively, advertising, direct 
or general, is likely to be the most efficient agency. Yet here again it 
is possible, though generally not economical, to distribute a commodity 
through a series of middlemen and yet the sale at each stage be 
accomplished by description. And the use of salesmen in selling 
by description is common, as where heavy machinery is sold by 
the use of photographs, or hardware and like commodities from 
catalogues. 

The number of possible combinations of methods and agencies 
renders the problem of the producer-merchant an intricate one. It 
will be seen that he has a difficult task in analyzing the market 
with reference to his goods, and in working out that combination of 
methods and agencies which will give him the most efficient system 
of distribution. 



342 MATERIALS FOR ELEMENTARY ECONOMICS 

III. THE MIDDLEMAN IN DISTRIBUTION 

The middleman is a by-product of a complex industrial organiza- 
tion. Chart I shows in rough outline the evolution of the mi4dleman 
from the early period when producer dealt directly with consumer to 
the appearance of the orthodox type of distribution (late in the 
eighteenth century and in the first quarter of the nineteenth century) 
when a complicated series of middlemen existed. It should be noted 
that this chart represents the typical case of the domestic product 
rather than that of imported commodities. 

In the more primitive barter economy, the producer deals directly 
with the consumer, and middlemen take no part in the transaction. 
In the mediaeval period, as the handicrafts become specialized occupa- 
tions under a town market regime, the producer is a retailer and sells 
directly to the consumers. Then as the market widens, a division of 
labor is necessary and the merchant appears as an organizer of the 
market. The handicraftsman becomes a steady worker, no longer 
concerning himself with selling. He becomes in many cases practi- 
cally an employee of the merchant-retailer, who provides the stock 
and bears the risk. The merchant takes the finished goods from the 
producer and sells them to the consumer. 

Steadily the market widens until we find a national market. The 
merchant is no longer a single intermediary between the producer and 
the consumer. The merchant who takes the goods from the producer 
disposes of them to retail merchants who in turn distribute them to 
the consumer. After a long period, we find the producers gradually 
strengthening their financial position, and freeing themselves from the 
control of a single merchant. They become merchant-producers. 
They assume the burden of production, and dispose of the product to 
various wholesalers who in turn sell to retailers, and they to the 
consumers. As a world-market appears, the producer disposes of a 
part of his product to the export merchant. 

In the early days of the factory system, shown in Chart II, we 
find that the producers have lost their character as merchants and are 
devoting themselves to the problems of production. The pressure on 
production has continued, and with the increasing intricacy of 
industry producers have found it necessary to concentrate their 
attention on production. The selling agent appears as a link in the 
chain of distribution to relieve the producer of the task of selling his 
product. The selling agent undertakes to sell the entire output of the 



MARKETS AND TRADING 



343 



u 



c 




c 




rr-| 


i 








z 


o 








— ar- 

—z- 


9 








-^ 



13 




« 
IB 

O 

X 

3 




K 




-T- 




s 








-)i- 


z 


o 





-Jtt_ 

: J . -s- 

s ; 5 1= 

!J LU Ll S 



e 

D 

o 
o 

& 




«5 




-3— 




ij 


Z 






ill ■■ 


2 


O 


u 



> o \ 






E3- 



■B 



344 MATERIALS FOR ELEMENTARY ECONOMICS 

producer, distributes it among wholesalers, who in turn distribute it 
to retailers, and the retailers to the consuming public. 

This may be termed the orthodox type in distribution, a type 
almost universal in the early decades of the nineteenth century, and 
still common, as in the textile industry in New England. 

Just as the long period of development from a system of barter 
economy to the early decades of the factory system showed a con- 
tinuous tendency for increase in the number of middlemen intervening 
between the producer and the consumer, so recent years have shown 
a growing tendency to decrease the number of successive steps in 
distribution. The tendency is apparent in nearly every industry and 
has been clearly marked in recent years. 

Under the orthodox type of distribution, with numerous middle- 
men intervening between the producer and the consumer, the producer 
is in a position of disadvantage. The fixed charges under which he 
operates render it necessary that he operate continuously. The outlet 
for his goods, however, is controlled by middlemen. Hence the 
middleman is able to exert pressure upon the producer and force a 
narrowing of his margin of profit. To free themselves from this 
pressure, the stronger merchant-producers seek to go around the 
immediate middlemen, thus decreasing the number of steps in the 
system of distribution. 

Chart II is an attempt to show diagrammatically the development 
of this tendency to decrease the number of successive middlemen. 
By the use of salesmen going directly to the wholesaler and by adver- 
tising directed to the retailer the producer has displaced the selling 
agent in many cases. Sometimes the advertising is directed not only 
to the retailers but also to the wholesalers. To strengthen still 
further his position the producer will often use advertising directed to 
the consumer to build up a demand for his product. This involves 
the necessity for a product differentiated by trade mark, brand, or 
trade name. When the producer thus directly builds up a demand 
among consumers, he often takes the further step of sending his sales- 
men to the retailer, thus omitting the wholesaler entirely from his 
system of distribution. 

The most extreme step in the process is the complete elimination 
of middlemen, and the sale direct from the merchant-producer to the 
consumer, either by advertising alone or by salesmen supplemented 
by advertising. Manufacturers of specialties have largely adopted 
this scheme of distribution and the enormous growth of the mail-order 



MARKETS AND TRADING 



345 



.^ 



Ill -w- 

'-• ~Tr- 

o 



5 4= 

— I u3C 








flC 
w 

« 

o 

z 




-J 
*- 
c 




— W- 




Ul 




£ 










tft 




z 




9 




J.. 





I* 



-' 5 5 

S " ~»~ 

u — — ^— ^ « 3 

-* K — a — 

•J LJ S 



L 



5 

S ?S 5 

O ————— Jw ■ in ^— — _ 

I I I t 



346 MATERIALS FOR ELEMENTARY ECONOMICS 

business in recent years gives evidence that in some lines of distribution 
there are economies in this system. 

The tendency to decrease the number of middlemen is one of the 
most characteristic features of modern distribution. It promises to 
show much greater development in the future if present economic 
conditions substantially continue. The attempts of associations of 
retailers to check the growth of direct selling have thus far not been 
successful. In their desire to force the manufacturer to dispose of his 
product through regular trade channels they sometimes invoke the 
boycott. But our common state statutes, prohibiting combinations 
in restraint of trade, prevent effective agreements to boycott pro- 
ducers who sell direct. And the advantages of direct selling in some 
lines render the producer willing to incur the disfavor of the trade. 

To understand what seems to be a present tendency to go around 
the middleman as well as to consider the problem of the merchant- 
producer with reference to the use of middlemen in distribution, it is 
necessary to analyze the functions performed by the middleman. 
Roughly the general functions may be listed as follows: 

1. Sharing the risk, 

2. Transporting the goods. 

3. Financing the operations. 

4. Selling (communication of ideas about the goods). 

5. Assembling, assorting, and reshipping. 

These functions were at first taken over by areas; that is, each 
successive middleman in the series took over a part of each function. 
Each took the risk of destruction of the goods while he held title. 
Eadh took the risk of credit losses. Each took a share in the trans- 
portation of the goods along the route from the producer's stockroom 
to the hands of the consumers. Each took a part in financing the 
entire operation. Each had a part in the selling, disposing of the goods 
he purchased to succeeding middlemen and finally to the consumer. 
And each finally took a part in assembling, assorting, and reshipping 
the goods to make them physically available to the consumer. 

But at a relatively early date a taking-over of these functions by 
kind instead of by area appeared. Today we have what may be 
termed functional middlemen in the insurance companies, direct 
transportation companies, and banks. 

The insurance company is in a real sense a middleman in distri- 
bution. When it insures the producer against loss of goods by fire, 
against credit losses, and the like, it is taking over the function of risk 



MARKETS AND TRADING 347 

formerly shared by successive middlemen. Today the insurance 
company will assume practically the entire element of risk. It is 
possible, for instance, for a large department store to insure against 
unseasonable holiday weather. The insurance company differs from 
the ordinary middleman in that it takes over one function as such 
rather than portions of a number of functions. 

So improvements in direct transportation have enabled the pro- 
ducer to turn to a functional middleman to convey the goods to the 
consumer. The transportation companies and the express companies 
are in a true sense middlemen in distribution, though they perform 
but one of the functions formerly shared by the successive middlemen 
who took over functions by area. The physical conveyance of the 
goods to the consumer was formerly one of the most important func- 
tions performed by a series of middlemen. 

So the function of financing the operations has largely been taken 
from the regular middleman. In former times the middleman took 
his part in the burden of finance in addition to his other functions. In 
most industries today the bank, as a functional middleman, cares for 
the element of finance in the operations of distribution. By advancing 
on goods and on commercial paper, it largely absorbs the function of 
finance in distribution. 

Another development has lessened the dependence of the producer 
upon the middleman for financial assistance. The application of the 
corporate form to industrial organization has made it possible to draw 
together larger bodies of operating capital and hence to place the 
producer in a stronger financial position. 

As a result of the development of functional middlemen, ready to 
take over the functions of sharing the risk, transporting the goods, and 
financing the operations, the importance of the middleman for these 
functions has diminished. There remain the function of selling (the 
communication of ideas about the goods) and the function of assem- 
bling, assorting, and reshipping. It is as to these functions that the 
middleman is of most importance today. 

IV. THE SALESMAN AS AN AGENCY IN DISTRIBUTION 

A less detailed analysis than was necessary in the case of the 
middleman will be required for the salesman. The primary function 
for which salesmen are used is the communication of ideas about the 
goods to the prospective purchaser; that is, the selling function. 

The salesman, in the sense of a man sent to prospective purchasers, 



348 MATERIALS FOR ELEMENTARY ECONOMICS 

generally sells from sample. In some few cases the sale may be in 
bulk, the salesman showing the prospective purchaser the actual goods 
to be purchased. And as has been suggested, the salesman may sell 
entirely by description, merely showing the prospective purchaser 
pictures of the goods, as in selling from catalogue. 

When the producer finds it desirable to go around a middleman 
and to sell directly to a subsequent middleman or to the consumer, he 
may use for the selling function either his own salesmen or advertis- 
ing, or the two in combination. 

When one analyzes the salesman as an agency for sale by descrip- 
tion in contrast with advertising, direct or general, he must take into 
account the human element again. Advertising has the obvious 
advantage that you can convey exactly the idea you wish to convey 
in the form you wish to convey it. It lacks, however, the personality 
and the timeliness of the salesman's visit; it lacks adaptability, the 
opportunity to use the mood of the customer and all the various 
human factors that make the salesman effective. 

More than this, when the salesman has aroused in the prospective 
purchaser a demand for the goods in question, he is on the ground to 
close the sale at once. In the case of advertising, the demand aroused 
must, in general, be strong enough to lead the prospective purchaser 
to go to some trouble before he obtains the actual goods. Hence a less 
intensive demand may be more immediately effective in the case of the 
salesman than when advertising is concerned. 

It should here be emphasized that the analogy between direct 
salesmen and advertising is very close. Each agency is largely used to 
enable the producer to take over one function of the middleman, that 
is, the selling function. And in each case the root idea is the same. 
The producer seeks to communicate to the prospective purchaser 
through one or the other agency, or a combination of the two, such 
ideas about the goods as will create a conscious demand for them. 
The direct salesman and advertising are different modes of accom- 
plishing the same end. 

V. ADVERTISING AS AN AGENCY IN DISTRIBUTION 

Advertising in the modern commercial sense is of comparatively 
recent development. Only in the middle of the nineteenth century 
did it commence to be of real importance in the commercial world. It 
is a necessary consequence of sale by description. So long as the 
prevailing code of commercial ethics made sale in bulk the oiily 



MARKETS AND TRADING 349 

practical method, the middleman was an indispensable selling agency» 
But now that the general average of intelligence enables the prospec- 
tive purchaser to gain an idea of the goods without seeing them and 
without seeing a sample, and now that the prevailing code of business 
ethics is such that the prospective buyer feels that he may rely upon 
the description given him, advertising becomes in many lines the most 
economical agency for the exercise of the selling function. Even 
where the actual sale is made by salesmen from sample, advertising is 
used as a supplementary agency to build up a demand which the 
salesman crystallizes. And sale by advertising alone may be applied 
today even where the purchaser demands to see the goods before 
concluding the purchase, by sending the goods to him on approval. 

Not only is the modern development of advertising dependent upon 
the possibility of sale by description, but it also depends upon the 
increasing differentiation of commodities by trade marks, brands, and 
trade names. The producer cannot profitably convey to the consumer 
ideas about a certain food product which will build up a demand for 
that product, unless the consumer is able to identify the particular 
product when he goes into the grocery store to purchase it. 

Advertising, in the broad sense, includes not only selling letters 
and circulars, but newspaper and periodical advertising, billboards 
and window cards, electric signs, street-car advertising, catalogues, 
and all the varied forms of modern commercial publicity. A rough 
classification is made between general and direct advertising. General 
advertising includes newspaper and magazine advertising, billboards, 
electric signs, street-car advertising and the like, aimed at the general 
public or some section of it. Direct advertising is used in reference to 
the sending of selling letters, circulars, or catalogues to the persons 
whose names appear on a mailing list and to reach whom the material 
sent is specially adapted. 

VI. ANALYSIS OF THE MARKET 

The problem presented by the United States as a consuming 
market is a complex one. Here are ninety-odd million people dis- 
tributed over an area of more than 3,000,000 square miles (excluding 
Alaska). Some are gathered in the large cities, where millions jostle 
elbows. Some are scattered over great areas with considerable 
distances between them and their neighbors. Some daily pass 
hundreds of retail stores; some must ride miles to reach the nearest 
store. Wide extremes in purchasing power exist. Millions have a 



350 MATERIALS FOR ELEMENTARY ECONOMICS 

purchasing power scarcely sufficient to obtain for themselves the barest 
necessities of life. A few can satisfy the most extravagant whims of 
the human imagination. Between these extremes lie all degrees of 
purchasing power, the number in each class becoming greater as you 
descend in the scale of purchasing power. 

Their wants are as varied as their purchasing power. Environ- 
ment, education, social custom, individual habits, and all the varia- 
tions in body and mind tend to render human wants diverse. In each 
individual there are certain conscious needs being constantly gratified 
by the purchase of goods produced for such gratification. Then there 
are the conscious needs which go ungratified because of the limitations 
upon purchasing power and the existence of other needs of greater felt 
importance. And then there are the unformulated, subconscious 
needs which fail of expression because the individual is ignorant of the 
existence of goods which would gratify them. 

The business man must first realize the intricacy of the problems 
he has to solve. He must analyze his market. The market splits 
up into economic and social strata, as well as into geographic sections. 

The distributer cannot disregard the geographic distribution of the 
consuming public. He may be able to sell profitably by salesmen 
where the population is dense, while such method of sale would be 
unprofitable in a region where there is a sparse population. If he 
bases a judgment upon the average cost of selling by salesmen for the 
whole market, he may well go wrong, since the average might show 
that the use of such an agency was on the whole profitable, while yet 
in some sections entering into the average the use of salesmen was 
actually unprofitable. Again, it might be economical for the dis- 
tributer to establish his own branch stores in the denser urban centers, 
while in the sparsely populated regions he could most profitably 
distribute his product through the regular channels. 

If, then, a sound system of distribution is to be established, the 
business man must realize that each distinct geographic section is a 
separate problem. The whole market breaks up into differing regions. 

Equally important is a realization of what may be termed the 
market contour. The market, for the purposes of the distributer, is 
not a level plain. The distributer of a staple hat at $^3 . 00 appeals to 
different economic and social strata, faces different considerations, and 
finds different selling methods necessary, as compared with distribu- 
ters selling a $5.00 trade-marked hat, or those distributers selling 
$4 . 00 or $6 . 00 trade-marked hats. Differences in economic and social 



MARKETS AND TRADING 351 

strata to be reached are as important as differences in geographic 
location and density, if a sound system of distribution is to be worked 
out. 

Take the distributer who seeks to map out a selling campaign for a 
Catholic publication. It is essential that he take into account not 
merely the geographic distribution of the Catholic population in the 
United States, the regions where it is relatively dense, and the regions 
where it constitutes a small element in the population, but also he 
must take into account the distribution of that population through the 
economic strata of society. A method of distribution successful in 
New Orleans, where the Catholic population is dense and spread 
through all economic strata of society, might well fail if applied in 
Maine, where the Catholic population is relatively sparse and found 
mostly in the lower economic strata. 

A careful analysis of his market, then, by areas and by strata, is 
the first task of the modern distributer. 

Nor does the merchant-producer ordinarily realize how intricate is 
his problem as to the agency or combination of agencies that will be 
most efficient in reaching his market. The business man often adopts 
one method and becomes an advocate of it, disregarding entirely other 
methods. While the method adopted may be more efficient than any 
other single method, it is apparent that a method which is relatively 
efficient in reaching one area may be inferior to another method in 
reaching another area. And so a system of distribution which has 
proven very effective in reaching one economic stratum may be 
relatively inefl&cient when employed to reach a different economic 
stratum in society. 

The problem, then, of working out the most effective combination 
of agencies is a most complicated one. Each distinct area and 
economic stratum must be treated as a separate problem, and, more- 
over, the economic generalizations embodied in the law of diminishing 
returns must be taken into account in choosing that combination of 
selling agencies which will give, in the aggregate, the most efficient 
organization of the market. 



352 MATERIALS FOR ELEMENTARY ECONOMICS 

95. MARKETING FARM PRODUCTS^ 

The simplest system of marketing is that in which a producer 
sells directly to the consumer or to unassociated consumers. There 
is a ring around each city and town in which may be found agricul- 
tural producers who come directly into contact with consumers in 
the sale of products. The producer delivers in his own wagon. 

If there were co-operative associations of consumers in cities 
and towns the delivery by the farmer directly to them would be 
more simple than his present deliveries to consumers individually. 

TRAVELING BUYERS 

Distribution of farm products between producer and consumer 
has many variations of system. 

Selling to buyers who come to the farm is practiced in some 
degree in many parts of the United States. Traveling hucksters in 
many regions go from farm to farm gathering eggs, butter, poultry, 
calves, and similar commodities, which they sell to shippers, jobbers, 
or retail dealers. Agents of large merchants go to farms on the 
Pacific coast to buy hops, to ranges in the Rocky Mountains for wool, 
to plantations in Louisiana and southeastern Texas to bargain for 
rice, and to the orchards of the apple-producing states east of the 
Rocky Mountains. The cattle buyer also is a frequent visitor at 
many farms, especially where stock raising is a secondary industry, 

GENERAL MERCHANTS 

One of the most important persons in the distribution of some 
products is the merchant of the town or the rural community. He 
is often the first receiver of such products as eggs, farm-made butter, 
poultry, wool, hides, and sometimes cotton, grain, and hay. It is 
the custom, less so than formerly, for a local merchant to credit a 
planter of cotton or rice, or his tenants, with supplies for a crop year, 
and to take a lien upon a growing crop to cover the value of the 
merchandise thus sold. In such a case it is frequently the practice 
that the crop, when ready for market, is turned over to the merchant 
by the planter or tenant, who receives the difference between his 
debt and the proceeds from the crop. The importance of the country 
merchant as a distributing factor in some regions is diminishing, for 

' Adapted from U.S. Department of Agriculture, Report No. 98, Systems of 
Marketing Farm Prodiicts and Demand for Such Products at Trade Centers (1913), 
pp. 10-14. 



MARKETS AND TRADING 353 

he has been supplanted to a greater or less degree by dealers in special 
products. 

LOCAL BUYERS OF SPECIAL PRODUCTS 

In the regions where grain is the staple product the tendency has 
been for the storekeeper to be displaced by the grain dealer and the 
local elevator man. Among other examples of local buyers of special 
produce are the California fruit packer, who buys from growers; 
the egg and poultry shipper in the Middle West, whose purchases 
are made from country merchants and who ships by carload lots to 
wholesale dealers; the San Francisco (Cal.) wool merchant, who buys 
on the range and sells in the East; the poultry packer in the North 
Central states, who buys live fowls, slaughters them, and consigns 
to eastern cities; and the "track buyers" of watermelons in the 
region near San Antonio, Tex., of peaches in Georgia, and of hogs 
in the corn belt. 

COMMISSION DEALERS 

The individual farmer who ships his products by rail or water to 
a market and does not sell directly to consumers must sell through, 
or to, middlemen. They commonly sell through commission mer- 
chants, but to some extent sell directly to wholesale dealers, and, also, 
to retail dealers. The results to the farmer of selling through middle- 
men are both good and bad. 

The commission dealer is the agent through whom a large amount 
of produce is sold for farmers or country shippers. He usually repre- 
sents the seller, but there are instances where he serves as agent of 
the buyer, as in some sales of live stock to distant buyers or in the 
purchase of Pacific coast hops for eastern dealers. 

In addition to serving as agent in making a sale, a commission man 
may advance money to a producer or to a country buyer, as when a 
live-stock commission firm loans money to feeders or when a grain- 
commission firm supplies a local grain dealer with sufiicient cash to 
begin his season's purchases. Another phase of commission dealing 
is that engaged in by rice and cotton factors, who advance money on 
crop liens, and to whom these products are frequently consigned to 
be sold on commission. In some states, for instance, in South Caro- 
lina, banks are reported to be taking the place of the cotton factor 
in making loans, and the presence of buyers and neighboring mills 
enables planters sometimes to market their cotton without the aid of 
factors. Another class of factors are those in the Baltimore tobacco 



354 MATERIALS FOR ELEMENTARY ECONOMICS 

trade, who receive consignments, for instance, from farmers in Mary- 
land and Ohio, and who sell to exporters. 

DIRECT SALES WITHOUT AID OF MIDDLEMEN 

Common instances of the producer's selling direct and delivering 
to the door of the consumer occur in the marketing of milk, butter, 
eggs, poultry, fruits, vegetables, hay, and other farm products. Milk 
producers in the neighborhood of Erie, Pa., through their organiza- 
tion, deliver milk direct to consumers. Numerous poultry raisers 
sell exhibition stock direct to other poultry raisers. Eggs for hatch- 
ing are also sold in this way. Registered cattle are often sold at 
auctions, held periodically by the owners. Retail sales of fruit, 
vegetables, poultry, eggs, and dairy products direct by producers 
to consumer are made also in public market places. 

In a sense, a mill or a factory may be regarded as a consumer. 
An old instance of the producer's selling in wholesale lots direct to 
the consumer is that of the farmer taking his grain to a near-by mill. 
A sale of sugar beets to a neighboring factory is another example of 
direct bargaining between producer and consumer; so is the sale and 
delivery of milk to a creamery, apples to an evaporating establishment, 
and fruits and vegetables to neighboring canning houses. 

TRANSFER THROUGH ONE MIDDLEMAN 

A large number of transactions are made in which only one 
middleman assists in the transfer from producer to consumer. A 
common example is that of a town merchant who buys produce from 
farmers and sells it to consumers. 

Among the other instances of a single middleman intervening 
between producer and consumer may be noted the commission man 
at a large market who receives consignments of live stock from 
farmers and sells to packers; the factors to whom the planter con- 
signs his rice or cotton and from whom purchases are often made by 
millers; the warehouseman who manages the sale of a Virginia 
planter's tobacco; and the "line" or system of elevators which buys 
grain from farmers and sells to millers. Pennsylvania tobacco is 
often bought at the farm by a dealer who sells to manufacturers. 

It is common practice in a number of cities — for instance, New 
York, N.Y., Philadelphia, Pa., and Washington, D.C. — for milk to 
be handled by one middleman, namely, the city retailer, who buys 
direct from the producer. A considerable part of the supply of New 



MARKETS AND TRADING 355 

York City is delivered at country shipping points to stations or 
"creameries" owned by New York dealers who sell in the city at 
retail. 

An organization which brings the grain producer nearer the great 
mills is the farmers' elevator. The plan of its operation has some 
features similar to that of the wool warehouses of Chicago and 
Omaha. Farmers co-operate in building an elevator and in employing 
a manager. 

MARKETING THROUGH TWO MIDDLEMEN 

The intervention of two middlemen between producer and con- 
sumer is a common occurrence. The farmer may consign to a distant 
commission man or sell to a local dealer, and the next transaction of 
the series may be the sale to a retail merchant whose customers are 
consumers. A common way of marketing live stock is for the farmer 
to sell to a buyer who ships to a commission merchant at a large pack- 
ing center, where the animals are sold frequently to packers. Fruits 
and vegetables are marketed often through the aid of two middlemen, 
the city commission dealer and the retail merchant. Two middlemen 
are involved also in some sales of produce made by farmers' co-opera- 
tive societies; the first, unless the sales-manager of a society be classed 
as a middleman, being the wholesale or the commission dealer, and the 
second the retail merchant. 

TRANSACTIONS INVOLVING THREE OR MORE MIDDLEMEN 

A series of three middlemen may include, first, the local buyer or 
shipper; second, the commission dealer or the wholesale merchant; 
and third, the retail merchant. Watermelons from the region of 
San Antonio, Tex., are reported to be distributed in considerable 
quantities through such a series of dealers. Traveling hucksters in 
Missouri buy poultry from farmers and sell occasionally to merchants 
or to commission firms, who in turn include among their customers 
some retail dealers. Apple dealers in this country purchase the fruit 
from growers and sell to United States agents of German importers. 
The third in this series of middlemen is the retail dealer in Germany. 

In the sale of fruit by auction, as is common in large cities east of 
the Mississippi River, the auctioneer is an additional middleman. 
He may sell for a commission dealer to whom the consignment may 
have been made by a country buyer; and the purchaser at such an 
auction may be a jobber, who in turn sells to a retail merchant. Five 
middlemen are thus concerned in such a transaction. 



356 MATERIALS FOR ELEMENTARY ECONOMICS 

96. RETAIL DISTRIBUTION OF FARM MACHINERY' 

Over 95 per cent of all the farm machinery used in the country is 
purchased from the local implement dealer. The system of direct 
selling by the manufacturer to the farmer has not been extensively 
developed in this branch of industry. 

When factories first began to take over the work of the local black- 
smith and wagon-maker in supplying the needs of the farmer, it 
became necessary to establish agencies with local storekeepers. As 
retail trade became differentiated, implements and hardware were 
commonly sold by the same dealer, and indeed still are in some parts 
of the country. Later, as implements increased in variety and the 
trade became further developed, in many sections the handling of 
farm machinery grew into a distinct business. These dealers gen- 
erally took up also the sale of wagons and other vehicles used by the 
farmer, and are therefore usually referred to as implement and vehicle 
dealers. From the beginning the dealer was an active force in push- 
ing the sale of machines; he provided space for the storage and 
exhibition of machines; he showed farmers how machines should be 
operated; and he was able to furnish information to the manufac- 
turer as to the reliability of prospective customers among the farmers 
in his vicinity. 

The terms of the agreement under which the dealer handles the 
products of the manufacturer of farm machinery are usually defined 
in a printed contract furnished by the manufacturer. This agreement 
names the conditions under which the dealer undertakes to handle 
the goods and under which the manufacturer agrees to furnish them. 
It enumerates the kind or kinds of machinery to be handled and pro- 
vides for prices, terms of payment, discounts, point from which 
dealer is to pay freight, and such other matters as may be considered 
necessary under the particular form of contract employed. Some- 
times it also specifies the quantity of machines to be purchased, but 
frequently leaves this to be determined later. Such contracts are 
usually referred to as agency contracts, although in form they may 
be either commission contracts or contracts of sale. Under the former 
the dealer is nominally the commission agent of the manufacturer, 
title to the goods or to the proceeds remaining in the latter until 
settlement, the dealer receiving the difference between the wholesale 
price of the manufacturer and the price paid by the retail purchaser 

* Adapted from the Report of the United States Commissioner of Corporations 
onthe International Harvester Co. (1913), pp. 291-94. 



MARKETS AND TRADING 357 

as his commission or compensation. Under the sale contract the 
dealer buys the goods outright and becomes responsible for payment, 
although many contracts of this sort contain provisions intended to 
protect the manufacturer in case the dealer is threatened with insolv- 
ency. Some manufacturers use both kinds of contract with various 
modifications in particular terms. 

The period of time usually covered by these contracts is one year. 
The contract is submitted by the manufacturer's salesmen to the 
dealer before the opening of the season which it covers, usually the fall 
before, or at some other time before the business of the new season is 
under way. It is customary for the contract to contain a clause 
providing that after it has been signed by the dealer and the manu- 
facturer's representative it must be approved by the general agent 
or some representative of corresponding responsibility before it 
becomes binding on the manufacturer. 

The investment of the dealer, which is chiefly in his stock, varies 
somewhat according to the form of contract he has. His success 
under ordinary conditions, like that of other merchants, depends 
upon his ability to gauge the market demand for the goods and his 
skill as a salesman. From time to time he is visited by the manu- 
facturer's salesmen soliciting orders under the contract. Except in 
harvesting machinery most manufacturers leave the work of solicit- 
ing farmers' orders to the dealer and his employees, so that the 
number of machines that the dealer sells to farmers and the prices 
received usually depend upon his own efforts. 

Generally speaking, the dealer does not contract to handle more 
than one or two makes or brands of any particular kind of machine, 
and often is not allowed to by the manufacturer whose goods he sells. 
After selling the machines of a particular make for several years he 
may work up a custom closely connected with that brand of goods. 

At most towns there are only two or three implement dealers. 
This fact, taken in connection with the fact that few dealers handle 
more than one or two makes of any one kind of machine, presents a 
very serious problem to manufacturers of lines in which there exist 
a considerable number of competing factories. With a limited number 
of implement dealers in any particular locality it is clear that in some 
towns some manufacturers cannot secure the services of a dealer 
with an established trade. The difficulty of securing satisfactory 
dealers at such points is often so great that some concerns contract 
with dealers whom other concerns consider unsuitable credit risks. 



358 MATERIALS FOR ELEMENTARY ECONOMICS 

Even this method of securing representation is not free from diffi- 
culties; for the dealers themselves are organized into local, state and 
national associations the chief purpose of which is to protect the trade 
of the retail dealer against any tendency on the part of manufacturers 
or jobbers to sell direct to farmers, or to so-called "irregular" dealers. 
It is, therefore, a great advantage in several ways for the manu- 
facturers to contract with dealers having an established trade. 

In a few sections these conditions, among others, have led some 
makers of farm machinery to establish their own retail stores, but 
this method has not assumed any special importance as a means of 
reaching the farmer. A few manufacturers sell their products by the 
mail-order method, either directly or through established mail-order 
houses. 

The retail distribution of harvesting machines, however, developed 
certain peculiar characteristics. From the time that they began to 
be sold it was the common practice for the local blacksmith or store- 
keeper to agree with the manufacturer to handle such machines on a 
consignment basis, receiving as compensation a part of the retail 
price which was generally fixed by the manufacturer. To some extent 
this was true of various branches of the implement trade, but it was 
an especially prominent feature in the case of harvesting machines. 
This system of selling on a commission contract was due to the high 
prices of harvesting machines for which neither the farmers nor the 
dealers were generally able to pay in cash. For this reason the manu- 
facturer in settlement with the dealer agreed to accept farmers' notes, 
generally drawn to cover payments in two or three annual install- 
ments. In this manner the farmer was enabled to pay for a machine 
from the proceeds of the crops harvested with it. While this placed 
a financial burden on the manufacturer by increasing the capital he 
required, it also became a source of additional profit, since credit or 
long-time sales to farmers were at higher prices and the notes often 
bore interest both before and after maturity, and frequently at a 
high rate. Dealers of greater financial strength sometimes paid cash 
or settled for the machines with their own notes. 

The collection of great numbers of such notes required a special 
organization and large expense; the discounting of such notes appar- 
ently was not widely practiced. The harvester trade, therefore, early 
required the investment of considerable capital in the form of notes 
and accounts receivable. 

The use of a large amount of capital was also necessary by reason 
of other expenses peculiar to this branch of the implement industry. 



MARKETS AND TRADING 359 

To work in connection with the local dealers a great many salesmen 
or "canvassers" were introduced. The canvasser was the local 
representative of a particular manufacturer, and not, like the local 
dealer interested in the sale of goods of various makers ; consequently 
he was a more persistent force in pushing the sales of his particular 
line among farmers. Another expense was that for the services of the 
so-called "expert." Since machines were shipped to dealers in parts, 
or in a "knocked down" condition, the several parts had to be 
assembled properly. Mechanical difficulties in setting up and operat- 
ing the machines were adjusted by the expert. This was an expense 
that manufacturers of most other kinds of farm machinery did not 
have to meet. 

These special characteristics of the trade gave rise to some differ- 
ences in the relations between dealers and manufacturers of harvest- 
ing machinery, as distinguished from those existing between dealers 
and manufacturers of other lines, such as plows, tillage implements 
farm wagons, etc. In the first place, the dealer's contract for harvest- 
ing machinery was a commission or consignment contract; the con- 
tract with other manufacturers was more frequently a contract of 
purchase under which the dealer bought his goods and paid for them. 
Then, too, manufacturers of other lines than harvesting machines 
did not usually employ canvassers; consequently they did not come so 
closely in touch with the farmer, nor did they have so intimate a 
knowledge of the business of individual dealers. Furthermore, they 
generally sold to the dealer for cash or on relatively short terms, while 
harvesting-machine manufacturers gave long credits. 

97. THE DISTRIBUTING SYSTEM OF THE INTERNATIONAL 
HARVESTER COMPANY' 

The distributing system of the International Harvester Co. is 
centered in the International Harvester Co. of America, which buys 
the machines and other products of the International Harvester Co. 
and also some outside goods. The America company sells principally 
to dealers who in turn sell to farmers. 

The sales organization of the America company is under the super- 
vision of a general sales manager at Chicago. Under him are a 
domestic sales manager in charge of selling operations in the United 
States and Canada, and a foreign sales manager in charge of selling 
operations in other parts of the world. 

' Adapted from the Report oj the United States Commissioner of Corporations 
on the International Harvester Co. ("1913), pp. 295-96, 31. 



360 MATERIALS FOR ELEMENTARY ECONOMICS 

The United States is divided by the company into five sales dis- 
tricts called, respectively, the Eastern, Southern, Central, North- 
western, and Southwestern districts, each of which is in immediate 
charge of a district sales manager with headquarters at Chicago. 
Each sales district is divided into general agencies, of which there are 
about 90 in the United States. In charge of each general agency is a 
general agent, who directs the traveling men and office employees of the 
general agency, approves contracts made with the local dealers, and 
has general supervision of the company's business in the group of 
counties assigned to his general agency. His territory is divided 
into "blocks" of one or more counties. 

In each "block" a traveling man, known as a blockman, has 
immediate supervision over the trade with dealers. Through him the 
dealer comes in personal contact with the company in making his 
contract of agency and in ordering goods from the company. The 
blockman keeps constantly in touch with the needs, financial con- 
dition, etc., of dealers, and the extent to which competing goods are 
handled in his territory. 

The company employs about 700 blockmen. While the travelers 
for most other concerns ordinarily get around to a particular town only 
once or twice a year, blockmen of the International Harvester Co. 
as a rule return to each dealer several times during a season. To 
accomplish this each blockman is given a comparatively small terri- 
tory to cover. 

Canvassers are also employed by the company to assist the block- 
men and to aid the dealer in soliciting orders for International Harves- 
ter Co. machines and other products among the neighboring farmers. 
A large proportion of the farmers in the United States are visited 
several times a year by one or more of these canvassers, who report 
the farmer's prospective needs to the company. The company also 
employs experts (though not so many as formerly) to aid in setting 
up and starting machines and to adjust difficulties that may develop 
in their use. A separate force is employed for the collection of 
accounts, and branch offices or agencies for collection are established 
at various points in the United States. 

[The report continues with a discussion of what it calls the objectionable 
competitive methods of the International Harvester Co., listing the follow- 
ing as the chief of these methods.] 

(i) Maintenance of bogus independent companies in the early 
years of the company's operation. 



MARKETS AND TRADING 36 1 

(2) Attempts to force dealers carrying its harvesting machines 
into carrying additional lines or certain International lines exclu- 
sively. At an earlier date the contracts of the Harvester company 
contained an exclusive clause for harvesting machines. 

(3) Efforts to secure an undue proportion of desirable dealers in 
a given town by giving only one of its several brands of harvesting 
machines to a dealer, thus tending to restrict the outlet for competi- 
tive goods. 

(4) Use of "suggested price" lists, tending to influence the final 
retail price; earlier the contracts themselves provided for fixing of 
retail prices by the company. 

(5) Occasional discrimination in prices and terms. 

(6) Misrepresentations by salesmen regarding competitors. 

98. CO-OPERATIVE FRUIT MARKETING' 

The California orange and lemon crop equals 50,000 carloads, 
or about 20,000,000 boxes. There are between 10,000 and 12,000 
growers engaged in the culture of the fruit. Four-fifths of the growers 
are organized into co-operative associations, more than 60 per cent 
of which are federated into the California Fruit Growers' Exchange. 

The California Fruit Growers' Exchange is an organization which 
acts as a clearing house in providing the facilities through which 6,500 
growers distribute and market their fruit. There are three founda- 
tion stones in the exchange systems — the local associations of growers, 
the district exchanges, and the central exchange. The local associa- 
tions, the district exchanges, and the central or California Fruit 
Growers' Exchange are organized and managed by the growers on a 
nonprofit co-operative basis, each of them operating at cost, and each 
distributing the entire net proceeds to the growers after operating 
expenses are deducted. 

The Local Exchange. — The California Fruit Growers' Exchange 
comprises 115 local associations, each of which has from 40 to 200 
members. The growers usually organize as a corporation without 
profit, under the laws of California, issuing stock to each member in 
proportion to his bearing acreage, to the number of boxes he ships, 
or in equal amounts to each grower. The association assembles the 
fruit in a packing house, and there grades, pools, packs, and prepares 
it for shipment. The associations are managed by a board of directors 

' From U.S. Department of Agriculture, Report No. 98, Systems of Marketing 
Farm Products and Demand for Such Products at Trade Centers (1913), pp. 169-71. 



362 MATERIALS FOR ELEMENTARY ECONOMICS 

through a manager and are conducted exclusively for the benefit of 
the growers. They declare no dividends and accumulate no profits. 
The fruit is pooled each month, or in a shorter or longer period, each 
grower receiving his proportion of the proceeds received for each 
grade shipped during the pool. Many of the associations pick the 
fruit, and some of them prune and fumigate the trees for the members. 
Each association has brands for each grade, and when a carload is 
ready for shipment it is marketed through the district exchange, of 
which the association is a member, through the agents and facilities 
provided by the California Fruit Growers' Exchange. 

The District Exchange. — There are 17 district exchanges. These 
exchanges are corporations without profit. There may be one or 
more district exchanges in a community, depending upon the number 
of local associations and other local conditions. The district exchange 
acts as a clearing house in marketing the fruit for the associations 
through the California Fruit Growers' Exchange and acts as a medium 
through which most of the business relations between the exchange 
and the local associations are handled. The district exchange orders 
cars and sees that they are placed by the railroad at the various asso- 
ciation packing houses; keeps a record of the cars shipped by each 
association, with their destinations; informs itself, through the Cali- 
fornia Fruit Growers' Exchange, of all phases of the citrus marketing 
business; places the information before the associations; receives 
the returns for the fruit through the central exchange and returns the 
proceeds to the associations. 

The Central Exchange. — The California Fruit Growers' Exchange 
is a nonprofit corporation under the laws of California. It is formed 
by 17 district exchanges, with a paid-in capital stock of $17,000. 
It is managed by a board of 17 directors through a general manager, 
one director representing each district exchange. The function of 
the California Fruit Growers' Exchange is to furnish marketing 
facilities for the district exchanges at a pro rata share of the cost. 
The exchange places bonded agents in the principal markets of the 
United States and Canada, defines the duties of the agents, and 
exercises supervision over them. It gathers information through 
them of conditions in each market, receives telegraphic advices of 
the sale of each car and furnishes the information every day in bulletin 
form to the local associations. The exchange business is on a cash 
basis; it makes prompt accounting of returns to the growers through 
the district exchanges; it takes care of litigation that arises in con- 
nection with the marketing of the fruit ; handles all claims; conducts 



MARKETS AND TRADING 3l 

an extensive advertising campaign to increase the demand for citrus 
fruit; develops new markets, and performs such other functions as 
are set forth in the contract between the central exchange and the 
district exchanges. The central exchange levies an assessment 
against each district exchange for a pro rata share of the expense on 
the basis of the number of boxes shipped. It declares no dividends. 
It does not buy or sell fruit or any other commodity, and exercises 
no control either directly or indirectly over sale or purchase. Its 
function is to provide facilities for the distribution and marketing 
of the fruit for those shippers who desire such facilities. Under the 
exchange system every shipper reserves the right to regulate and 
control his own shipments; to develop his own brands of fruit; to 
use his own judgment as to when and in what amount it shall be 
shipped, to what markets it shall be shipped, and the price he is willing 
to receive, reserving the right of free competition with all other 
shippers, including the members of the same organization, uncon- 
trolled by any one. The agent in the market acts directly under 
the order of the shipper, who determines the prices at which each 
car shall be sold outside of the auction markets, and all other matters 
connected with its distribution, the California Fruit Growers' 
Exchange acting as the medium through which orders pass from the 
agent to the shipper, but never selling a car or determining the price 
at which the fruit shall be sold. 

The exchange is a democratic organization; the growers exercise 
control over all matters. Membership in the exchange is voluntary; 
a grower may withdraw from an association at the end of a year; 
an association may withdraw from a district exchange, and a district 
exchange may withdraw from the central exchange; these relations 
being set forth in the various contracts that hold the members 
together. There is no attempt on the part of the central exchange 
to regulate shipments, to eliminate competition, divide the territory 
or business or to influence prices. In this connection its functions 
are to keep the associations informed daily regarding the shipments 
from the state; the general movement of exchange cars, the general 
conditions of the different marketing points; the prices at which the 
exchange fruit is sold; and in furnishing such other information as 
will allow the growers and shippers through their association and 
district exchanges to decide the questions of distribution and market- 
ing for themselves. 

One-third of the entire shipments are sold at public auction, the 
remainder through unrestricted private competition. There is no 



MATERIALS FOR ELEMENTARY ECONOMICS 

-xiormity in price in the different brands, because the fruit in each 
.ection, on account of soil and other local differences, has an indi- 
viduality of its own, and every brand sells on its own merits. 

The exchange is organized into several divisions: sales, legal, 
traffic, advertising, insurance, and mutual protection, and a supply 
department which furnishes the materials used in the packing houses 
and on the ranches at cost to the members. The exchange does not 
consign fruit. It is shipped on order; soldf.o.b.; or sold " delivered, 
subject to usual terms." The exchange maintains district managers 
in all of the important cities of the United States and Canada. These 
employees are exclusively salaried agents engaged only in the sale 
of fruit, in the development of markets, and in handling the local 
business problems of the exchange. 

99. ORGANIZED EXCHANGES: THE GRADING OF COTTON' 

The cotton crop comprises a very wide range of quality. This is 
largely due to the peculiar nature of the plant, which, instead of 
maturing its product at practically one time, produces over a long 
period. Thus, of the cotton bolls of a single stalk, some may open, 
say, late in August or early in September, whereas others may not 
ripen for many weeks, or even several months, this depending largely 
upon the weather. Moreover, the gathering of the crop extends over 
a still longer period. In fact, the harvesting of the crop, which 
begins about August, is seldom really completed before February of 
the following year, although, of course, the great bulk of the crop is 
gathered long before this. 

These factors have a very important bearing upon the quality of 
the crop. That portion of the crop which ripens first is ordinarily 
of a brighter color and much more free from dirt than that gathered 
toward the end of the season, when, owing to continued exposure to 
changes in the weather, such as frosts and storms, the cotton becomes 
more and more discolored and damaged. The grade of cotton is also 
affected by the method of gathering. Carelessness in picking, which 
results in getting an undue amount of stem and leaf into the staple, 
materially lowers the grade. 

The grade of cotton, as recognized by cotton exchanges, is, in the 
main, determined by the degree of color and the amount of foreign 
matter, such as leaf and dirt, which it contains. The length of the 
staple, although an extremely important matter in determining the 

' Adapted from the Report of the United States Commissioner of Corporations 
on Cotton Exchanges, Part I (1Q08), pp. 62-72. 



MARKETS AND TRADING 365 

spinning value of cotton, is a distinct consideration, which is not 
regularly taken account of in official classifications. The strength 
of staple is also largely disregarded in official classifications. There is, 
of course, a general relationship between grade and spinning value. 

In the grading of cotton, thirteen distinct grades are very gener- 
ally recognized in the spot cotton markets of this country. These 
from highest to lowest are as follows: 

Fair Strict low middling 

Strict middling fair Low middling 

Middling fair Strict good ordinary 

Strict good middling Good ordinary 

Good middling Strict ordinary 

Strict middling Ordinary' 
Middling 

Of the grades in the above list, those designated "strict" are com- 
monly spoken of in the trade as ''half grades," the others being 
"full grades." As more fully shown later, the New York Exchange 
formerly recognized quarter grades also. 

This range, however, covers only what are known as white cottons ; 
that is, cotton showing practically iio discoloration, although not 
necessarily strictly white, especially in the case of the lower grades. 
Cotton that is discolored falls in separate classes, although the same 
grade names are still maintained, being qualified according to the 
degree of color by such adjectives as "tinged" or "stained," as, for 
instance, "strict good middling tinged," "strict low middling tinged," 
"good ordinary tinged," "low middling stained." The tinged and 
stained grades can not readily be described. Tinged cotton is only 
moderately discolored; stained cotton may range anywhere from a 
light yellow to a deep red or as it is called in the trade "foxy" color. 
It may be noted that tinged or stained cottons do not have any fixed 
value in relation to white cottons of the corresponding grade names; 
that is to say, low middling tinged cotton does not necessarily come 
next in value to low middling. 

The basis grade in all markets is middling white cotton. This 
grade is the universal standard by which the quality of all the other 
grades is measured. It is a fleecy cotton, very nearly white in color, 
and containing only a small amount of foreign matter. Fair cotton, 
the highest grade recognized, is a very bright, white, clean cotton. 
The other grades down to "ordinary" contain an increasing amount 
of foreign matter, and the lowest grades usually are somewhat dingy ; 

' Some markets also recognize grades of strict low ordinary and low ordinary. 



•366 



MATERIALS FOR ELEMENTARY ECONOMICS 



for instance, good ordinary, which is the lowest so-called white grade 
that can be tendered upon future contracts either in New York or 
in New Orleans, contains a large amount of leaf and stem and often- 
times more or less dirt. Below low ordinary are some miscellaneous 
classes of cotton for which there are no recognized grades and which 

Grades of Cotton Deliverable on Contract at New York 



Prior to Jan. i, 1908 


Jan. 1 to Mar. 31, 1908 


On and after Apr. i, 1908 


Fair 


Fair 


Fair 


Strict middling fair 


Strict middling fair 


Strict middling fair 


Middling fair 


Middling fair 


Middling fair 


Barely middling fair 


Strict good middling 


Strict good middling 


Strict good middling 


Good middling 


Good middling 


Fully good middling 


Strict middling 


Strict middling 


Good middling 


Middling 


Middling 


Barely good middling 


Strict low middling 


Strict low middling 


Strict middling 


Low middling 


Low middling 


Middling 


Strict good ordinary 


Strict good ordinary 


Strict low middling 


Good ordinary 


Good ordinary 


Fully low middling 


Strict good middling 


Strict good middling 


Low middling 


tinged 


tinged 


Barely low middling 


Good middling tinged 


Good middling tinged 


Strict good ordinary 


Strict middling tinged 


Strict middling tinged 


Fully good ordinary 


Middling tinged 


Middling tinged 


Good ordinary 


Strict low middling tinged 


Strict low middling tinged 


Strict good middling 


Low middling tinged 


Low middling tinged 


tinged 


Middling stained 


Middling stained 


Good middling tinged 


Strict low middling stained 




Strict middling tinged 






Middling tinged 






Strict low middling tinged 






Low middling tinged 






Strict good ordinary 






tinged 






Fully middling stained 






Middling stained 






Barely middling stained 






Strict low middling 






stained 






Fully low middling 






stained 






Low middling stained 






Total number of grades 


Total number of grades 


Total number of grades 


deliverable, 30 


deliverable, 19 


deliverable, 18 



are of such poor quality that no mention need be made of them here. 
The tinged and stained grades, as just noted, are in groups by 
themselves. 

Every crop is more or less distinctive in character. Thus, one 
crop may be very bright and white, another may be of a "creamy" 



MARKETS AND TRADING 367 

character, another dingy. On this account the trade often speaks of 
cotton as being of "good color," meaning that while it may not be 
strictly white it is not discolored by being tinged, spotted, or stained. 

The methods of grading and classing cotton employed by the New 
York Cotton Exchange are in sharp contrast with those prevailing 
in southern markets, and, in fact, are unique. The New York Cotton 
Exchange has placed the entire work of inspecting and classing cotton 
intended for delivery on future contracts in the hands of an inspection 
bureau. The organization of this bureau includes an inspector in 
chief, an assistant inspector in chief, assistant inspectors, a classifica- 
tion committee, samplers, weighers, and other officials, nearly all of 
whom are salaried employees of the exchange. The inspector in 
chief, who is also a member of the classification committee, and 
furthermore secretary of the warehouse and delivery committee of 
the exchange, is the head of the bureau. The assistant inspectors 
conduct a preliminary inspection and examination of the cotton, 
including the drawing of samples, as it is originally received at the 
warehouse or dock. The classification committee examines the 
samples and establishes their grade. Members of the committee, 
who are supposed to be experts in the business of classing cotton, are 
employed at a salary and are required to give their entire time to the 
work of classification. They are not allowed to engage in the cotton 
business in any way. They may, however, be members of the cotton 
exchange and go upon the floor of the exchange for the purpose of 
getting information. The classification committee until recently 
consisted of seven members. In 1907 two aged members of the 
classification committee were retired on a pension, so that the com- 
mittee now consists of five active members. 

The list of grades as it was prior to January i, 1908, and as it is 
at present, is shown on p. 366. 

100. ORGANIZED EXCHANGES: FUTURES, PUTS, AND CALLS' 

A future contract in cotton may be defined as an agreement on the 
part of the seller to deliver, and of the buyer to receive, at some future 
date, a certain quantity of cotton (in the case of the New York and 
New Orleans cotton exchanges 50,000 pounds, or approximately 100 

■ Adapted from the Report of the United States Commissioner of Corporations 
on Cotton Exchanges, Part I (1908), pp. 1-2, 46-47. 

[For other aspects of dealings on the exchanges see Selection 106: "Organized 
Speculation and Its Regulation," and Selection 228: "Hedging as an Insurance 
Against Risk." — Editors.] . 



368 MATERIALS FOR ELEMENTARY ECONOMICS 

bales), the contract price being fixed at the time the contract is made. 
The seller, at the time he enters into the contract, may or may not 
have the cotton on hand; in the latter case he is "selling short," 
relying on his ability to secure cotton, or another contract representing 
cotton, prior to the maturity of the contract thus sold. A future 
transaction differs from a "spot" transaction in that the latter is 
made from goods on hand, or immediately available, and calls for 
practically immediate delivery. Future transactions may be made, 
and indeed are constantly made, by private agreement outside of 
exchanges. The organized development of such transactions by 
means of exchanges may, however, properly be termed the "future 
system." 

There are but two exchanges in the United States on which 
organized future trading in cotton is conducted — the New York 
Cotton Exchange and the New Orleans Cotton Exchange. Abroad, 
a large business in futures is transacted on the floor of the Liverpool 
Cotton Association, and some future business is done on the Havre 
Bourse. 

A vitally important characteristic of future contracts in cotton is 
that they are "basis" contracts; that is, they do not call for the 
delivery of a specific grade of cotton, but allow the seller the option of 
delivering any grade or a number of grades within certain wide limits. 
The buyer has no option in this respect. He must receive any 
deliverable grade or grades tendered by the seller. "Middling" 
cotton is always the basis grade and can be delivered on contract at 
exactly the contract price. Other grades are delivered at prices 
relative to middling — or, to use the trade expression, at certain 
"differences" in price "on" (i.e., over) or "off" (i.e., under) middling. 
Thus, if an operator sells a future contract on an exchange at lo cents, 
he can deliver middling cotton thereon at exactly the contract price; 
or, if he prefers, he can deliver a higher grade of cotton, like "good 
middling," in which case the buyer must pay, in addition to the basis 
price of lo cents, a difference of, say, one-half cent "on" that price, 
making io| cents. On the other hand, if the seller prefers to deliver 
a lower grade, like, say, "low middling," the buyer must take it, but 
is allowed a deduction or difference "off" the contract price, and pays, 
say, 9I cents. In the same way the seller may deliver both high 
grades and low grades on a single contract. 

Future contracts are often, though incorrectly, spoken of as 
synonymous with "options." There is a wide difference between the 



MARKETS AND TRADING 369 

two. ''Options,'' as the word implies, are mere privileges entitling 
one party, for a fixed consideration which is really nothing more than 
a forfeit, to call upon the other party for, or to deliver to him, a certain 
quantity of merchandise at a fixed price. The important distinction 
is that these are mere privileges which may or may not be exercised; 
whereas, in the case of a future contract, no such choice is allowed. 
An option which entitles the buyer to demand of the seller the delivery 
of a certain quantity of goods at a fixed price is known as a "call," 
while one which entitles him to deliver to the seller of the option such 
goods is known as a "put." Sometimes two options are combined in 
one, and the transaction is then usually spoken of as a "spread" or 
"straddle."' 

A call may be described more concretely as follows: An operator, 
say, in the stock market, at a time when a certain stock is selling at 
par (100), believes that it is going much higher. Instead of buying 
the stock outright or on margin, he buys from a person having a con- 
siderable quantity of the stock the right to call upon that person for 
a certain number of shares within a fixed time, at a certain price above 
the market, say at 105. For this privilege he pays the other party, 
say, $2 per share. If, prior to the expiration of the time limit, the 
price has gone to no, the buyer of the call may demand the delivery 
of the stipulated number of shares, which the seller must deliver at 
the stipulated price of 105. The buyer then sells out his stock at no 
and makes a profit of 5 points, less the 2 points he paid for his call 
and other expenses, such as commissions. On the other hand, if the 
price goes to 95 without recovery during the time limit, the buyer of 
the call will not demand delivery, since he would still have to pay 
the stipulated price of 105, but will allow his option to lapse, in which 
case, of course, he forfeits the price paid for his privilege. 

A put is just the reverse of a call. For instance, an operator in the 
stock market, at a time when a given stock is selling at 100, believes 
that it will go to, say, 90. Instead of selling it short, in which case 
he would have to put up a considerable margin and run the risk of 
heavy loss in case the market advanced instead of declined, such an 
operator buys from another operator, who is not of the same mind, a 
put; that is, he buys the privilege or right to deliver to this second 
operator a given number of shares of this stock at, say, 98 at any 
time within a certain agreed period. For this privilege he may pay 
the seller of the put, say, $2 a share. If the stock goes to 90 within 

' Such straddles should not be confused with straddles on regular future 
contracts. 



370 MATERIALS FOR ELEMENTARY ECONOMICS 

the time limit, the buyer of the put will buy the stipulated number 
of shares in the open market and deliver them to the seller of the put, 
who must take them at 98; the buyer of the put (who, it may be noted, 
is the deliverer of the actual stock) therefore makes 8 points on the 
transaction, less 2 points to cover the cost of his put and incidental 
expenses such as commissions. If, on the other hand, the stock 
advances above 100, the buyer of the put obviously will not exercise 
his privilege, but will simply forfeit the price which he paid for 
the put. 

The above description explains the theory of these operations. In 
actual practice the two parties to these options usually make a settle- 
ment without the actual transfer of the stock; that is to say, in the 
case of the call described, the buyer of the call, instead of actually 
demanding the stock from the seller at 105 when the market price 
reaches no, simply receives from the seller of the call a payment of 
$S a share, less the cost, without any actual transfer or resale of the 
stock. On the other hand, if the operator buying the call has sold 
stock short at no, relying on his call to protect him, he may actually 
demand the stock and deliver it to the party to whom he has sold.^ 

The cost of such options varies, of course, with the conditions of 
the market and the views of the two parties concerned, but ordinarily 
the amount of money required to deal in options or privileges is 
relatively small as compared with that necessary to buy or sell the 
securities in question, even on a margin basis. These privileges, 
therefore, afford a means for speculating with the use of only a very 
small amount of capital. Furthermore, it is to be emphasized that 
it is optional with the buyer of such privilege whether he will exercise 
it or not. It is, therefore, apparent that, whatever their legal status, 
such privileges have much of the character of an ordinary wager.^ 
Further discussion of the matter is unnecessary here, since the rules 
of both the New York Cotton Exchange and the New Orleans Cotton 
Exchange — the only exchanges in this country on which organized 
future business in cotton is conducted — expressly forbid dealings in 
such options or privileges; indeed, exchanges rather generally prohibit 
such transactions on their floors, whether in stocks or in commodities. 

' Calls are also used by short sellers, so that in case the market advances 
unexpectedly they can demand stock on such calls and limit loss on their short sales. 

2 It should be noted, however, that even in the case of these privileges there is 
a right to require or to make delivery of the actual product, in which respect they 
differ widely from a mere bet. 



IX. VALUE 

loi. DEMAND AND GENERAL OVERPRODUCTION' 

Because the phenomenon of over-supply, and consequent incon- 
venience or loss to the producer or dealer, may exist in the case 
of any one commodity whatever, many persons, including some 
distinguished political economists, have thought that it may exist 
with regard to all commodities; that there may be a general over- 
production of wealth; a supply of commodities in the aggregate, 
surpassing the demand; and a consequent depressed condition of all 
classes of producers. 

When these writers speak of the supply of commodities as out- 
running the demand, it is not clear which of the two elements of 
demand they have in view— the desire to possess, or the means of 
purchase; whether their meaning is that there are, in such cases, 
more consumable products in existence than the public desires to 
consume, or merely more than it is able to pay for. In this uncer- 
tainty, it is necessary to examine both suppositions. 

First, let us suppose that the quantity of commodities produced 
is not greater than the community would be glad to consume: Is 
it, in that case, possible that there should be a deficiency of demand 
for all commodities for want of the means of payment ? Those who 
think so cannot have considered what it is which constitutes the 
means of payment for commodities. It is simply commodities. 
Each person's means of paying for the productions of other people 
consists of those which he himself possesses. All sellers are inevit- 
ably and ex vi termini buyers. Could we suddenly double the 
productive powers of the country, we should double the supply of 
commodities in every market; but we should, by the same stroke, 
double the purchasing power. Everybody would bring a double 
demand as well as supply — everybody would be able to buy twice 
as much, because every one would have twice as much to offer in 
exchange. It is probable, indeed, that there would now be a super- 
fluity of certain things. Although the community would willingly 

' From John Stuart Mill, Principles of Political Economy, Book III, chap. xiv. 
[On the subject of demand see also the selections under the head of "Wants 
and the Means of Their Satisfaction." — Editors.] 

371 



372 MATERIALS FOR ELEMENTARY ECONOMICS 

double its aggregate consumption, it may already have as much as 
it desires of some commodities, and it may prefer to do more than 
double its consumption of others, or to exercise its increased purchas- 
ing power on some new thing. If so, the supply will adapt itself 
accordingly, and the values of things will continue to conform to 
their cost of production. At any rate, it is a sheer absurdity that all 
things should fall in value, and that all producers should, in conse- 
quence, be insufficiently remunerated. If values remain the same, 
what becomes of prices is immaterial, since the remuneration of 
producers does not depend on how much money, but on how much 
of consumable articles, they obtain for their goods. Besides, money 
is a commodity; and if all commodities are supposed to be doubled 
in quantity, we must suppose money to be doubled too, and then 
prices would no more fall than values would. 

A general over-supply, or excess of all commodities above the 
demand, so far as demand consists in means of payment, is thus 
shown to be an impossibility. But it may perhaps be supposed that 
it is not the ability to purchase, but the desire to possess, that falls 
short, and that the general produce of industry may be greater than 
the community desires to consume — the part, at least, of the com- 
munity which has an equivalent to give. It is evident enough that 
produce makes a market for produce, and that there is wealth in 
the country with which to purchase all the wealth in the country; 
but those who have the means may not have the wants, and those 
who have the wants may be without the means. A portion, therefore, 
of the commodities produced may be unable to find a market from 
the absence of means in those who have the desire to consume, and 
the want of desire in those who have the means. 

This is much the most plausible form of the doctrine, and does 
not, like that which we first examined, involve a contradiction. 
There may easily be a greater quantity of any particular commodity 
than is desired by those who have the ability to purchase, and it is 
abstractedly conceivable that this might be the case with all com- 
modities. The error is in not perceiving that though all who have 
an equivalent to give might be fully provided with every consumable 
article which they desire, the fact that they go on adding to the 
production proves that this is not actually the case. Assume the 
most favorable hypothesis for the purpose, that of a limited com- 
munity, every member of which possesses as much of necessaries 
and of all known luxuries as he desires; and since it is not conceiv- 



VALUE 373 

able that persons whose wants were completely satisfied would labor 
and economize to obtain what they did not desire, suppose that a 
foreigner arrives and produces an additional quantity of something 
of which there was already enough. Here, it will be said, is over- 
production — true, I reply; over-production of that particular article; 
the community wanted no more of that, but it wanted something. 
The old inhabitants, indeed, wanted nothing; but did not the foreigner 
himself want something ? When he produced the superfluous article, 
was he laboring without a motive ? He has produced, but the wrong 
thing instead of the right. He wanted, perhaps, food, and has pro- 
duced watches, with which everybody was sufficiently supplied. The 
new comer brought with him into the country a demand for commodi- 
ties, equal to all that he could produce by his industry, and it was his 
business to see that the supply he brought should be suitable to that 
demand. If he could not produce something capable of exciting a 
new want or desire in the community, for the satisfaction of which 
some one would grow more food and give it to him in exchange, he 
had the alternative of growing food for himself; either on fresh land, 
if there was any unoccupied, or as a tenant, or partner, or servant, 
of some former occupier, willing to be partially relieved from labor. 
He has produced a thing not wanted instead of what was wanted; 
and he himself, perhaps, is not the kind of producer who is wanted; 
but there is no over-production; production is not excessive, but 
merely ill assorted. We saw before, that whoever brings additional 
commodities to the market, brings an additional power of purchase; 
we now see that he brings also an additional desire to consume; since 
if he had not that desire, he would not have troubled himself to pro- 
duce. Neither of the elements of demand, therefore, can be wanting, 
when there is an additional supply; though it is perfectly possible 
that the demand may be for one thing, and the supply may unfor- 
tunately consist of another. 

I02. ADVERTISING AND DEMAND' 

Advertising may be said to build up three general classes of 
demand: (i) expressed conscious demand, (2) unexpressed conscious 
demand, and (3) subconscious demand. 

'From A. W. Shaw, ''Some Problems in Market Distribution," Quarterly 
Journal of Economics, XXVI, 746 (August, 191 2). 

[For the more general discussion of market distribution by the same author 
see Selection 94. — Editors.] 



374 MATERIALS FOR ELEMENTARY ECONOMICS 

The three classes may be illustrated by supposing a product for 
sale by grocers to be advertised in a periodical of large circulation by 
a double page costing for one insertion $8,000. If as a result of the 
advertisement 30,000 people go to the grocery and buy the product, 
60,000 plan to purchase the product at some future time when such an 
article is needed, and 100,000 more become open to a further exciting 
force, such as seeing the product at the grocery and recognizing it as 
one advertised, then we should call the 30,000 the expressed conscious 
demand, the 60,000 the unexpressed conscious demand, and the 
100,000 the subconscious demand resulting from the advertisement. 
Expressed conscious demand means present sales; unexpressed con- 
scious demand means future sales; subconscious demand means that 
the field has been fertilized so that future selling efforts will be more 
fruitful. Unexpressed conscious demand and subconscious demand 
are difficult of measure but must always be taken into account in any 
consideration of the efficiency of advertising as a selling agency. 



103. THE ABILITY OF THE CONSUMER TO DEFEND 
HIMSELF^ 

The consumer is the point of attack, either immediately or ulti- 
mately, in every advertising campaign for advertising goods finally 
sold at retail. And while we are discussing methods of attack, is it 
not well to take stock of the consumer's defense? What are the 
characteristics of the consumer as a class which meet, and, in a 
measure, offset advertising and selling betterments ? Space will not 
let us catalogue more than a very few : 

(i) The consumer's spending power is limited by his earning 
ability. He may develop, or have stirred in him, new wants, strong 
enough to make him work harder in order to earn more, but he cannot 
honestly spend more money than he earns, no matter how complicated 
his wants may become. This sets a final limit on consuming capacity, 
and sets a limit to the exercise of his will. 

(2) The strength of the consumer's savings instinct determines 
the margin between his earning power and his willingness to spend. 
The strength of this instinct is only relative and here the consumer is 
vulnerable. His "will to save" is elastic. 

'From P. T. Cherington, Advertising as a Business Force, pp. 92-94, 116. 
Doubleday, Page & Co., 1913. (Copyrighted by the Associated Advertising Clubs 
of America.) 



VALUE 375 

(3) The "standard of living," the opinion of the class to which 
the consumer belongs as to what may be expected of him in the 
spending of his income, has its constant effect on a civilized man's 
conduct, and this again is relative and open to attack. 

(4) Price habits have tended to become fixed in many lines of 
retail business. The consumer has come to accept an increasing 
number of set prices, and set price intervals. There may be a few 
places in this country where a man expects to find a necktie line regu- 
larly carried at some price other than 50 cents or $1 or upward, but 
they are few. And so it is with suspenders, shirts, shoes, socks — al- 
most everything a man wears — certain price habits have become well 
established. This puts competition in these lines on a basis of 
quality, or service. It makes purchase easy for the consumer, but 
it modifies the character of the advertising appeal, as we shall see. 

(5) Buying habits are undergoing modification also. And these 
make another change in the advertiser's position. With price 
"higgling" partly eliminated, and the whole problem of appeal and 
sale based on quality and guaranteed satisfaction, the consumer has 
come to expect that goods can be bought without bargaining. The 
consumer certainly is safer in his purchasing, but equally certainly 
he is more careless. 

(6) And again there is the effect of the multiplicity of appeals 
being made to the consumer. The individual consumer and the 
consumer as a class is appealed to from so many sides that the effect 
of no single appeal can be what it would if it stood alone. 

To sum up these consumer defenses we find that, while the 
consumer, as an individual or as a class, may be led, stimulated, 
diverted, directed or otherwise influenced in buying, there are certain 
roughly ascertainable limits to the effects which may be expected 
to follow attacks on the will of the consumer. There are certain 
limits beyond which his earning power will not let him go, there 
are others, less certain, beyond which he will not buy unless his 
saving impulses are stifled, there are social and commercial habit 
barriers to consumer diversion, and last of all, the appeals to the 
consumer may partly neutralize each other by their mere multiplicity. 

These few points, out of many which could be considered, have 
been presented in order to help us appreciate how much more than a 
mere market for goods is the modern consumer. As an object of 
advertising attack he is a complicated and variable composite under 
pressure from within and without. And there is scarcely an emo- 



376 MATERIALS FOR ELEMENTARY ECONOMICS 

tional motive, or an economic impulse with any influence on human 
action, which can be ignored with safety by the advertiser who wants 
to catch and hold him. 

Nor is the consumer inert. He has powers of resistance, and 
he is learning how to use them. Even leaving the supremely impor- 
tant problems of consumer psychology out of consideration, he has 
means at hand for taking advantage of any weakness in advertising 
plans. The consumer problems of the modern advertiser are not 
merely to discover buyers of goods and to exploit them. They are 
as intricate as war plans. 

104. SOME CASES OF DEMAND AND SUPPLY^ 

Reflecting the influence of a hot weather demand, the market 
for watermelons at Chicago yesterday displayed decided firmness 
and prices took an upward jump of $15 to $40 per car, selling up to 
$300. Receipts were only 11 cars, which found a ready outlet at 
the upturn. 

More blackberries were on sale than on any previous day this 
year and prices took a sharp downward slump. Bakers, canners, 
and distillers were the principal buyers at $1.40 to $1.50 per case. 
Other berries held at former prices. Peaches were higher at $2.25 
per bushel. Receipts were 7 cars and the demand was broad. 

Constantinople advices said of attar of rose: "We are informed 
by our people in the interior that although the crop of flowers has 
been large in consequence of the propitious weather conditions, 
higher prices than last season have been paid for them. Besides 
this there are some other reasons increasing the cost of attar, princi- 
pally the smaller yield and the increased wages and expenses. Not- 
withstanding the bad yield after distillation, we estimate that there 
will be a little more oil this year on account of the larger number of 
roses; yet it is too early to say anything definite on the subject." 

Corn furnished considerable excitement in the grain markets 
yesterday, advancing i|c. to 2^c., with active and excited trading. 
The weather map was responsible for the initial impulse, as it showed 
higher temperatures in the southwestern part of the belt and an 
absence of rainfall and predictions of a continuance of these conditions. 

' From daily newspapers. 



VALUE 377 

It also furnished an excellent opportunity for the crop experts to 
get in their fine work, and reports of damage were more or less sen- 
sational all day. A statement issued by B. W. Snow said that his 
returns to date, covering almost half of the corn-producing counties, 
were showing sensationally on corn prospects. The worst damage 
was in Kansas, showing a drop of almost 50 points since July i , with 
the later reports making it even worse. Nebraska has declined 20 
points and Oklahoma 40, and Missouri 10 points, with practically 
every state in the Middle West or Southwest showing a decline. 
This would make the general average below 80 and would carry the 
total crop to 2,700,000,000 bushels, or a loss of 200,000,000 bushels 
since the first of July. This was a fair sample of the reports coming 
in, resulting in a stampede of shorts. Some crop experts, however, 
were inclined to take the other view. 0. K. Lyle, in a dispatch from 
Springfield, Mo., reported that state as about normal, with some 
betterment following the rains of last week. Practically all the 
offerings of corn were absorbed through the commission houses and 
some of the big speculators were declared to have put out new long 
lines. 

Oats felt the effect of the advance in corn and there were predic- 
tions that December would sell at 50c. a bushel at Chicago. Never- 
theless, the Iowa weather bulletin reported that late oats are turning 
out better than expected. There was considerable buying in sym- 
pathy with corn, and there were further estimates that the crop 
would be under a billion bushels. Prices were fc. to ic. higher at 
the close. 

Wheat was decidedly in the background as a speculative propo- 
sition, but closed about fc. higher owing to the strength in the coarse 
grains. There was considerable buying, particularly in the North- 
west, as a result of the sensational news regarding corn. The open- 
ing was weaker, owing to the lower cables and favorable reports 
relating to wheat. Receipts were again heavy and export demand 
was lacking. The arrivals at Chicago yesterday were 1,042 cars. 
Bradstreet's visible supply showed an increase of 4,316,000 bushels. 



The evidence that is coming to hand from one quarter and another 
tends to show that the earlier reports of dulness in the anthracite 
trade, the immense stocks of left-over coal in the hands of dealers, 
and the reluctance of the retail trade to buy at the spring discount 
have been somewhat overdrawn. It is true that orders are coming 



378 MATERIALS FOR ELEMENTARY ECONOMICS 

in slower than usual, but this is less important than might appear 
at first glance when it is remembered that the producers are generally 
heavily oversold in April and have to carry over many orders into May. 

As a matter of fact, coal has been coming to this market in such 
limited quantities since the first of the month that, instead of being 
troubled with a surplus, most shippers are behind on their orders. 

For one thing the weather this month has helped the retailers 
in moving stock carried over from winter. Probably more coal was 
used for heating during the first half of April than in the last half 
of March, or in any two weeks of March for that matter. Bare 
spots are beginning to show in a good many retail plants that appar- 
ently had enough coal on hand at the first of the month to last until 
May. Some dealers who deferred ordering because they were not 
quite ready to take in the tonnage, but at the same time would like 
to get some coal shipped at the April discount, are now sending in 
their orders. New England buyers are reported to be more backward 
than those in the vicinity of New York. 

It is quite the usual thing for a little flurry to develop as the end 
of a spring or summer month approaches, and perhaps the shippers 
will go into May with more orders on their books than seemed likely 
a short time ago. At any rate the April output will be taken care 
of in good shape, and little is heard now of individuals shading the 
circular. 

Conditions in the spot bituminous market seem to have improved 
somewhat in the past week. Not only is there a slightly better 
inquiry from buyers who have been slow in renewing contracts but 
there appears to be less cheap coal pressing for sale and being sacri- 
ficed at figures which mean a loss to the shipper. Occasional forced 
sales are heard of, but they are becoming less frequent. It is evident 
that the trade as a whole has made a very good get-away on the new 
year's business. The number of concerns reporting satisfactory 
progress in the closing-up of contracts is increasing week by week 
and the business almost invariably carries an advance over last 
year's prices. One peculiarity of the present season is that big 
business is less backward than small. One or two railroad companies 
which buy heavily in March for future delivery placed their usual 
contracts last month without making any serious objection to the 
higher prices which they were called upon to pay. 

While tariff agitation is no doubt causing manufacturers of 
protected articles a good deal of worry and has impelled some of 



VALUE 379 

them to go slow in making advance purchases of coal and other 
supplies, there has been little actual slowing-down at the factories. 
The output of manufactured goods in recent months has only about 
kept pace with demand and there is no heavy accumulation of stocks. 



The crude rubber market continues inactive and there is no evi- 
dence of any great desire to purchase by the manufacturers here.' 
With the close of the active tire manufacturing season there seems 
little chance that there will be any big demand for some months to 
come, and the present price for the Para grades, ranging from $i .05 to 
$1 . 08 per pound, is liable to decline further rather than advance, 
although, of course, the usual manipulative measures adopted so often 
in the rubber market may cause temporary advances which may range 
all the way from 5 to 15 cents a pound. 

But the general impression is that the time of high prices for 
rubber is past. That there will ever again be a period of $3 rubber 
is practically out of the question. In fact, there is no reason now for 
the belief that rubber above $1 . 70 is more than a possibility, at least 
for months to come. 

There are many reasons for this belief, principally, however, the 
fact that it is becoming easier every year to compute in advance the 
rubber output for the year. This is because Brazil no longer occupies 
the absolute center of the rubber-producing industry that was held 
by that country for so long. Rubber plantations started from five to 
ten years ago are now producing at a rate that makes them a big 
factor, and within a very few years they will be in a position to exert 
an even greater influence over the rubber market. Of course, Brazil 
will for many years be the chief producer of the highest grades of 
Para rubber, but she can no longer be said to have the domineering 
influence that, up until a year ago, she exercised. 

Crude rubber for the past month, even at the low level as compared 
with a year ago, has been strong. Particularly has this been true 
during most of the last week. During the last two days, however, 
weakness has again developed, and the price may soon be below the 
$1 mark again. Manufacturers are buying on the hand-to-mouth 
basis, it is generally acknowledged, and unless there is a big increase 
in the boot and shoe business this policy will probably continue 
throughout the winter. 

' From the Wall Street Journal, 191 1. 



380 MATERIALS FOR ELEMENTARY ECONOMICS 

According to the London Economist: "In 1909 the world's con- 
sumption of rubber was about 70,000 tons, of which the plantations 
provided at the most 4,000 tons; in 191 2 consumption had risen to 
about 100,000 tons, of which the plantations provided 30,000 tons. 
In three years' time Mr. Akers estimates that the plantations alone 
will yield 173,000 tons, and in 1919 302,000 tons. If prices fall to 
2S. a lb., it is perhaps not unreasonable to assume that consumption 
will continue to increase in the existing uses of rubber, and rise, 
perhaps, to 150,000 tons or even 200,000 in a few years, for as prices 
fall, not only will the consumption of rubber goods increase, but also 
genuine, good rubber will be substituted for the poor and composite 
materials which so frequently masquerade as 'rubber.' Unless, 
however, a very large demand arises for new industrial purposes 
which are not yet apparent, it will be impossible to dispose of the 
enormous quantities mentioned except at very much lower prices 
than have ever yet been known in the rubber market. In these 
circumstances clearly one of two things must happen. Either large 
tracts of land that have been planted must be abandoned to the 
jungle, or else the cost of working the estates must fall to the neigh- 
borhood of ()d. a lb. — a cost which has already been realized in favor- 
able circumstances in Ceylon. This is, indeed, a choice of evils, 
for both of these eventualities mean ruin or reconstruction for a good 
proportion of the boom estates. Such is the situation created by 
the reckless expansion of three years ago, during which some 75 
millions of British capital were invested and a million acres brought 
under cultivation or prepared for planting."^ 

105. DEMAND AND SUPPLY IN THE MARKET FOR AGRICUL- 
TURAL PRODUCTS^ 

THE SUPPLY AND THE PRICE OF EGGS 

The egg market lends itself well to the study of many of the forces 
which influence prices. Irregularity of the supply, variation in the 
quality of the product, and a highly elastic demand are characteris- 
tics strongly accentuated in the egg market. 

Irregularity of supply. — The monthly distribution of the annual 
production of eggs on a Wisconsin dairy farm is shown in Fig. i. The 

' From New York Journal of Commerce and Commercial Bulletin, June 4, 1913. 
^ Adapted from H. C. Taylor, The Prices of Farm Products. Bulletin No. 209, 
Wisconsin Agricultural Experiment Station, May, 191 1. 



VALUE 



381 



chart shows the percentage of the year's egg production gathered in 
each month in the year for five years. March and April were months 
of greatest production. The production fell off greatly during the 
summer months and reached its lowest level during the winter months. 
It is believed that this chart tells fairly well the story of the 
irregularity of egg production on farms where the keeping of poultry 
is primarily for supplying the wants of the household, and the sale of 
eggs more or less incidental. 




Fig. I. — The egg supply is irregular, varying with the months as shown by 
these statistics from one Wisconsin farm. Each bar represents the production for 
one month in terms of per cent of the annual total for each of the five years, 1905-10. 
This chart is based upon data collected by C. I. Brigham, a co-operator in farm 
records with the U.S. Department of Agriculture and this station. 

It is possible for the poultryman to control the egg production in 
such a manner as to secure a much larger proportion of the annual 
product in the winter months, but the bulk of the egg supply is not 
produced under these conditions. Taking the United States as a 
whole, there is little concentration in the poultry industry. It appears 
that the distribution is comparable with that of white women on 
farms. These facts all show that egg production is a widely dissemi- 



382 



MATERIALS FOR ELEMENTARY ECONOMICS 



nated non-specialized industry and that the supply is not likely to be 
appreciably influenced by the conscious action of a few individuals. 

The Chicago egg market. — ^The supply of eggs upon the Chicago 
market corresponds to these conditions of production. In Fig. 2 the 
solid black line represents the weekly supply of eggs brought to 
Chicago, from February i, 1909, to March 20, 191 1. The supply of 
eggs reached the maximum in April and May and gradually fell off 
until the end of the year. 

The price of eggs on the Chicago market shows the influence of the 
irregular supply. The black dots connected by lines, in Fig. 2, show 
the price of the best grade of eggs for one day in each week. 

The relation between the supply curve and the price curve in this 
chart illustrates the influence of variation in the supply upon the 



THOUSA^g) CftSES 
I CENTS PER OOZ 



CHCACO MARKET. 




FOlMCH APR fJIK(\]tXS^My\NJO SEPlOCT NCV|OeC \]AH. FIB MMl 
(910 



Fig. 2. — Weekly receipts and price of eggs of the "prime first" class on the 
Chicago market. February i, 1909, to March 20, 191 1. Note the irregularity 
of the supply; the relation of supply to price, a decrease in the supply being 
followed by an increase in the price, and also the wide difference in price be- 
tween fresh and storage eggs. 

price of this perishable commodity. The fact that the price of eggs 
in Chicago remained above 20 cents during the periods of greatest 
receipts in 1909 and 1910 calls for some explanation. The elastic 
character of the demand for eggs has already been mentioned. At a 
price between 20 and 25 cents eggs become an inexpensive substitute 
for meat, and at the time of the year under consideration, weather 
conditions are usually such that eggs can be put upon the market in 
good condition. Under these circumstances the consumption of eggs 
expands enormously. 

The storage of eggs. — The market is not entirely dependent, how- 
ever, at the period of maximum supply upon the demand for eggs for 



VALUE 383 

immediate consumption. At that period many eggs are purchased 
and put in storage for use during the period of scarcity of fresh eggs. 
The time of year when eggs are put in storage by one Chicago firm is 
shown in Fig. 3. Without question this speculative buying steadies 
the price during the spring months of excessive supply, distributes the 
consumption more evenly through the year, and secures for the pro- 
ducers a higher return for their eggs than could be secured without 
storage. 

The stored egg is much less valuable in winter than is the fresh 
supply. The lower price curve shown for a few winter months in Fig. 2 




Fig. 3. — Quantities of eggs put into storage each month by one Chicago firm. 
Note that practically the entire stock is purchased diu'ing a few weeks in the spring 
when prices are usually lowest as a result of an abundant supply. 

shows the prices of refrigerator eggs. It will be noted that there was 
often a difference of ten cents per dozen between the price of fresh 
and of stored eggs. It should also be noted that the price at which 
the refrigerator eggs were sold was not very much higher than the 
price at which they were purchased. There must, in the long run, 
be enough difference to pay the actual costs of storage including rent 
for the warehouse, losses due to deterioration, interest on the money 
invested, insurance, and enough profit to induce a business man to 
give his attention to this business instead of doing something else. 

The thing of first importance both to producer and to consumer 
is an understanding of the proper methods of handling eggs — proper 



384 MATERIALS FOR ELEMENTARY ECONOMICS 

methods on the farms, in the country stores, in transit, in cold storage, 
in the shop of the city retailer, and in the homes of the consumers. 
Success in holding a part of the eggs of the surplus season to meet 
the demands of the deficit season is dependent upon proper handling 
at every point. It is safe to say that more bad eggs reach the kitchens 
of America from other causes than from too great a length of time in 
cold storage. Furthermore, many eggs that reach the kitchen in 
good condition are allowed to deteriorate in a warm room before the 
cook finds occasion to make use of them. There is responsibility all 
along the Hne. 

The testimony before the senate committee relative to foods held 
in cold storage was to the effect that eggs produced during hot weather 
will not, even imder most favorable conditions, remain fit for use over 
three months, and that more often in less than a month they are 
unfit for human food. This is reason for not storing eggs more than 
temporarily during the hot months, but it does not give basis for 
legislation against the storage of eggs in the cool months of spring to 
be kept over until the period of scarcity. 

The risk is great in the storage of eggs, because of the fact that 
the whole supply must be gotten rid of before the increase in the 
supply of fresh eggs, or they may become almost a total loss. Note 
in Fig. 2 how the price of refrigerator eggs fell, in February, below the 
price which had been paid for them and then quotations ceased. 
This speculative feature is accentuated by the fact that the period of 
greatest scarcity is followed so closely and so abruptly by the period 
of maximum supply, and by the imcertainty of the time of this change, 
owing to the influence of the weather. 

Another aspect of the storage of eggs worthy of consideration is the 
relatively long time between the svuplus period and the period of 
scarcity. Vegetables may be stored late in the fall for winter use, 
but eggs must be stored early in the spring and kept through all the 
hot months. Natural conditions determine the length of this period 
of storage. Any government regulation intended to improve the 
conditions of the storage of eggs should conform to this fact. 

It is obvious that a law limiting the storage of eggs to three months 
ignores the condition of nature which makes storage desirable. If it 
is the purpose of Congress to put an end to the storage of eggs in the 
season of surplus for use in the period of scarcity, a three-month 
limit will be as effective as a ten-day limit. The normal length of 
time from the beginning of the surplus period to the end of the scarcity 



VALUE 385 

period should be accepted as the maximum length of time to store 
eggs. April is the month in which the maximum quantity of eggs is 
put in cold storage (Fig. 3). The stored eggs are drawn upon when- 
ever the supply of fresh eggs falls below the market demand. This 
means that even in August and September, stored eggs are used, but 
the greatest demand comes in December and the aim is to dispose of 
the whole supply by the end of January. 

If, when properly handled, eggs deteriorate so rapidly that those 
stored in April will be unwholesome in December and January, that 
would be adequate grounds for abolishing the cold storage of eggs so 
far as it relates to the equalizing the supply of the surplus and definite 
periods. If, however, by proper methods of handling from the farmer 
to the consumer eggs can be successfully kept from April until January, 
such storage will result in a great national economy. Obviously the 
storage industry should not be legislated out of existence if proper 
knowledge and eflEicient control are all that are needed in order to 
avail the people of the United States of this economy without danger 
to the health of the consumers. 

Government regulation, requiring that stored eggs be sold for 
exactly what they are, would be of great benefit both to the producer and 
to the consumer. If every egg sold carried a date stamped upon it by 
the producer, this in itself would enable the consumer to discrimi- 
nate between city stored eggs and those brought directly from 
the farm. Furthermore, much more might be done than has been 
to extend the limits of knowledge regarding the best methods of 
preserving eggs. 

Without government regulation the winter egg producers of a 
locality might protect themselves against unfair competition of stored 
eggs (the selling of stored eggs as fresh) by stamping their eggs in such 
a manner as will enable the consumer to know what he is buying. 

THE SUPPLY AND PRICE OF POTATOES 

There are several factors which make the price of potatoes very 
uncertain. While the supply from year to year is rather irregular the 
demand is inelastic. The size of the crop has little influence upon 
the quantity of potatoes the ordinary family in the city will buy. At 
almost any price that has prevailed the potato is cheaper than sub- 
stitutes. The demand being stable, and the potato having value only 
until the next crop comes into general use, the price shows wide 
fluctuations. 



386 



MATERIALS FOR ELEMENTARY ECONOMICS 



In Fig. 4 the areas of the checked bars represent the annual pro- 
duction of potatoes in the United States and the area in black repre- 
sents the production in Wisconsin. The monthly high and low prices 



(Xrn-S PER BUSHCL. 




THE MILWAUKEE POTATO MARKET ' 



Fig. 4. — ^The areas of the checked bars represent the annual production of 
potatoes in the United States, while the black bar represents the production of 
Wisconsin. The curves show the high and low prices each month. At the right, 
separate sets of curves are given for old and new potatoes, showing the higher 
price of the new stock. 

on the Milwaukee market are shown by dots connected by lines. It 
should be noted that there is a very wide range each month between 



VALUE 387 

the high price and the low price. This implies a very uncertain con- 
dition of the market. This wide range of prices is doubtless due, in 
part, to differences in the quality of the potatoes arriving on the 
market. This is indicated by the fact that the range is greatest at 
the time when old potatoes are yet on the market and new potatoes 
are arriving. For 19 10 the chart shows the high and the low prices 
for both old and new potatoes for four months. The indications are 
that the very high prices are for early potatoes shipped from a warmer 
climate. 

Normally the price is highest just before the local supplies of new 
potatoes arrive in abundance upon the market, falls to a low level 
just after potato harvest, and gradually rises during the season when 
most of the supply comes from storage. 

From 1906 to 1908 the potato crop decreased. There was a 
remarkable response in the price curve, and the 1908 crop was all 
sold at very remunerative prices. This was followed by an increase 
of about 10 per cent in the acreage devoted to potatoes the next 
year, and as the production per acre in 1909 was unusually high, the 
crop was enormous. The result was a continuous fall in prices. The 
price was not good at harvest time, but it grew worse every month. 
Thousands of bushels of potatoes were never sold by the farmers. 
The profit was out of the potato business, and yet the acreage planted 
in 1910 was practically the same as in 1909. The early crop was poor, 
but the total production was far above the amount which would 
command a remunerative price. It may seem strange that the 
farmers who had lost money on their 1909 potato crop should have 
continued to cultivate so large an acreage. In one potato region a 
government employee went about preaching the doctrine, "Now is 
the time to plant potatoes. Lots of people will be scared out, the 
crop will be small and prices high." It is probable that the very 
recent and unprofitable experience in the going out of hog production 
in order to sell corn only to find hog prices rising and corn prices 
falUng had some influence in keeping the potato growers of the north 
central states headed in the direction they were going. 

There is some degree of probability that the price of some of the 
staple farm products will gradually rise with the growth of population 
and the resulting increase in market demands. But it is not probable 
that the longtime average price of potatoes will ever rule very high. 
The production per acre is large; this means that rent is not a large 
item of cost per bushel. The area physically suited to potato pro- 



388 MATERIALS FOR ELEMENTARY ECONOMICS 

duction is vastly greater than will ever be needed for that purpose and 
there are areas of potato land, not valuable for other purposes, large 
enough to produce the whole supply. Potato growing for local con- 
sumption is likely to remain important throughout the northern states. 
But the profitable growing of potatoes for the central markets will 
probably be limited to relatively small areas which are good for 
potatoes, and of relatively less value for other purposes. 

FACTORS INFLUENCING THE PRICE OE CORN 

The supply of corn varies from year to year on account of changes 
in the acreage planted and variations in the climatic influences which 
determine the yield per acre. In 1901 the acreage was high, but the 
weather was so unfavorable that the production fell to about two- 
thirds of the normal crop, and the price increased in inverse proportion 
to the supply. In 1902 the crop reached a higher level than in 1900 
(Fig. 5). The price declined, but not to the level of 1900. 

From 1902 until 1907 corn prices showed no sensational tendencies. 
The price was always lowest after the season of corn gathering and 
highest during the summer months. This seasonal variation in prices 
is normal. Corn weighs more just after harvest than it does later, 
and the price should vary inversely with the amount of moisture it 
contains. The storage of corn involves loss from mice, rats, and other 
vermin. The interest on the money one could realize from the corn if 
sold is another inducement to sell early rather than hold the crop. 
These and other factors tend to keep the normal price of corn lower 
after harvest than at other seasons of the year. 

The price situation in 1908 requires some explanation besides the 
condition of the supply. The crop of 1907 was smaller than that for 
1905 or 1906, but larger than the crop for 1900, 1903, and 1904, which 
crops created no abnormal condition on the corn market. The 
explanation must be sought in changed conditions of demand. 

The demand which is effective in making corn prices is not limited 
to that made by manufacturing industries which use corn as a raw 
material, and that buy corn upon the market. The demand made by 
livestock upon the farmers where the corn is produced is of first 
importance. Taking the average for the years from 1900 to 1909, 
inclusive, 52 per cent of the corn crop was consumed within the 
county where grown, before March i of the year following its pro- 
duction. Twenty per cent had been sold and 38 . 2 per cent was in 
the hands of the farmer on March i. 



VALUE 



389 



There is a close relation between corn production and the swine 
industry. The important regions of swine production are in the corn 
belt. But it should be noted also that some parts of the corn belt are 
not so important in swine production as others. Central Illinois, for 
example, shows great concentration of corn production, but the swine 
industry is of relatively small importance in this region. 

There seems to be a division of territory within the corn belt with 
regard to the methods of realizing on the corn crop. Illinois sells 




Fig. 5. — The acreage of the corn crop of the United States is shown by the 
left-hand bar for each year and the annual crop in bushels by the right-hand bar. 
The ratio between area and yield is such that the two bars would be equal when 
the average yield is twenty-five bushels per acre. The two curves show the 
high and low prices of corn at Chicago for the period, 1900 to 1910. 

more than twice as large a proportion of her corn crop as does Iowa.'' 
This may be explained in part by the fact that IlUnois is more centrally 
located with respect to the brewing, distilUng, and other industries 
which consume corn. Nearness to Chicago, the greatest corn market, 
is also a factor tending to make this condition the normal one. 

The demand for corn by the swine industry varies with the price 
of hogs. The feeding of corn to hogs was unusually profitable during 

• Yearbook, U.S. Department of Agriculture, 1909, p. 437. 



39° 



MATERIALS FOR ELEMENTARY ECONOMICS 



the years 1906 and 1907. This stimulated the swine industry until 
the number of hogs to be fed from the 1907 crop was the greatest ever 
known in America (Fig. 6). The hogs required so nearly all the corn 
that the supply available for industrial purposes was very small. A 
hog half grown has to be prepared for the market even if the price it 
will bring would not justify the rearing of the pig, for the only way to 
realize anything on the investment already made in producing half- 



CMCAGO ■ r-lARKET. 




Fig. 6. — Relation of the price and supply of hogs to the price of corn at 
Chicago. The price curves are so drawn that when one bushel of corn produces 
ten pounds of pork the amount which the hog-price c\irve rises above the corn- 
price curve represents the net return for the extra labor of breeding and feeding. 
In 1906 and 1907 there was large profit in feeding corn to hogs, while in 1908 there 
was a loss. The figures on the margin represent the monthly high price of com 
in cents per bushel, the monthly high price of hogs in tenths of cents per pound, 
and the monthly receipts of hogs in tens of thousands. 



grown hogs is to continue adding to the investment until they can be 
marketed. In 1908 this required the feeding of high-priced corn to 
relatively low-priced hogs. Farmers fed corn to hogs with the feeling 
that they would have made more money had they sold the corn. This 
condition resulted in a decline in swine breeding. The resulting reduc- 
tion in the demand for corn for the feed lot, accompanied with an 



VALUE 391 

increased production of corn, brought into operation the forces which 
explain the present downward trend of prices on the corn market. 

The corn region of the United States is Umited on the north and 
on the west by climatic conditions, but in the south the limit is set by 
the competition of cotton. Cotton and corn occupy the same position 
in the system of crop rotation. They are both crops which can be 
cultivated while growing and which for this reason can be called 
cleansing and tilth-giving crops. Without a crop of this kind in the 
rotation it becomes necessary to introduce the summer fallow into the 
rotation. The purpose of the fallow is to give opportunity for culti- 
vating the land in order to clear it of weeds and bring it into good tilth. 

Not only do corn and cotton occupy the same place in the field 
system, but they both require the attention of the farmer at the same 
time. This means that with a given land and labor supply the corn 
can be increased in the cotton belt only by decreasing cotton produc- 
tion, and vice versa. When the price of corn is very high relative to 
the price of cotton the acreage of corn can be increased in the cotton 
belt. It happened that the high price of corn was contemporaneous 
with the extension of the ravages of the boll weevil into the cotton 
regions of Mississippi and Louisiana. These two forces operated 
together in making corn better able to compete with cotton. To 
these conditions in part it is to be attributed that the corn acreage of 
1910 was much greater than in 1908. In the United States as a whole 
the acreage increased 1 2 . i per cent. In Iowa the increase was 4 . 5 
per cent, in Illinois 12.3 per cent, while the increase was 16.6 per 
cent in South Carolina, 15.5 per cent in Alabama, 21.9 per cent in 
Mississippi, and 45 . 6 per cent in Louisiana. 

106. ORGANIZED SPECULATION AND ITS REGULATION' 

THE SERVICE OF ORGANIZED SPECULATION 

Laying aside the gusts and eddies of speculation and the choppy 
movements, it will be found that, notwithstanding the manipulations 
that take place, the prices of commodities vary with the demand 
and supply as shown by the net visible supply in store. 

In the diagram is shown a curve representing the yearly average 
prices and another representing the variations in the visible supply. 

'Adapted from H. H. Brace, The Value of Organized Speculation, pp. 132- 
33, 138-40, 178-79. Houghton Miflflin Co., 1913. 

[See also Selection 100: "Organized Exchanges: Futures, Puts, and Calls," 
and Selection 228: "Hedging as an Insurance Against Risk." — Editors.] 



392 



MATERIALS FOR ELEMENTARY ECONOMICS 



The curve representing visible supply has been reversed, so that 
when it bends downward, it shows that the supply is growing larger, 
and when it bends upward, a smaller supply is indicated. The reason 
the curve was made to vary in this way is because an increase in the 
visible supply is a bearish indication, and a decrease is a bullish indica- 
tion. If, then, the price of wheat goes down with an increase in the 
visible supply, and goes up with a decrease, the curves as arranged 
would indicate it, and suggest that the market did move in harmony 
with the demand and supply as revealed in the visible. 





5S 


i 


in 








1 


f^ 


s 




s 

2 


s 




05 


»H 


to 



S 

s 


i 




\ 




3 


1.20 
1.15 
1.10 
1.05 


















































































































































































































/ 
























































/ 


^ 














f 
























































/ 


\ 












/ 










.95 
.90 

.85 
.80 
.75 
.70 
.65 
.60 
.55 






















1 


























/ 






V 








( 










- 
























\ 
























/ 






\ 








/ 






























f 


\ 






















/ 










s. 




> 
































y 
























^'' 














s 


/ 
































/ 


















± 


?>' 


■> 


/ 














\ 


















N 
















' 








^ 






X 


-■ 


X 




































V 














/ 




























































s 










/ 


































































V 


y 






































































































































.25 

.30 

01.35 

5.40 

2.45 

5.55 
.60 
.65 
.70 
















































-1 


rn 


^ 


















/ 
























J 






V 
















^''y' 


»s 














/ 


























1 






\ 












c 


,^i 


> 












4 










/ 


























/ 










V 








« 


,/ 


















s 






y 




























/ 










\ 






J 


J> 


' 




















^ 




r- 


























^ 














N 


~> 


^^ 


















































/ 


^ 






































































/ 






























































^ 








1 




















































v 


»s 




/ 














































1 




J 


J 


s 


' 










































L 


L 
















J 



By examining the diagram the reader will see that, while there 
is by no means a proportionate variation between the two curves, 
their most important movements are coincident. Furthermore, it 
is seen that prices have a tendency to move sooner than the visible 
supply, thus indicating that the market leaders, from the reports 
of crops and acreage, together with other indications of prospective 
change in demand and supply, were able to predict what the visible 
would be, and hence to initiate a price movement before the demand 
and supply of the actual commodity were reflected in the visible. 

If trade were really free, if all dealers and producers acted with 
judgment and discretion, and if the facilities at hand for conducting 
each business were in all cases perfect; then speculation, as well as 
any business, would show better results to the community. One of 



VALUE 393 

the duties of organized speculation is to fix prices upon a legitimate 
commercial basis and to provide for their continued adaptation to the 
movements of trade and industry. It must be confessed that the 
result is accomplished but indifferently. The reason is principally 
found in the fact that the similarity of the business to gambling leads 
into the market all kinds of adventuring traders who have not given 
serious and painstaking study to the question of the fluctuations of 
prices and market improvements. 

Some of the important movements of prices under organized 
speculation are due to the trading of the amateurs or unskilled opera- 
tors just mentioned. The great number of purchases and sales that 
they make, most of them being based solely on mere whim or caprice, 
causes an exceedingly erratic market with numerous rapid minor 
declines and advances. But the professional speculators, many of 
whom deal in the actual commodities, have sufficient nerve and skill 
to anticipate the larger reactions and cycles and so to narrow down 
many of the wider swings of the market and keep it within closer 
limits. 

As a price regulator, therefore, organized speculation has some 
excellences mixed with serious faults. Organization tends to make 
any activity more effective; and the principal task accomplished by 
the speculator, whereby he stops a decline by his purchases and an 
advance by his sales, is facilitated by giving him the opportunity not 
only to buy before he sells, but also to sell before he buys. On the 
other hand, the extreme ease with which a deal may be made upon a 
speculative exchange and the small capital required are attractive 
influences upon the unskilled speculators, whose operations cause most 
of the confusion and erratic fluctuations seen in speculative markets. 
These amateur speculators, while losing their own money, derange 
the market, creating tendencies which even the wealthy professional 
speculators only partially overcome. 

The indirect effects of the facilities afforded by organized specu- 
lation upon the world of commerce exhibit its value in a better light 
than the direct effect of fixing prices. While the prices made are 
subject to criticism in that they are often artificial, the business of 
the exchanges is so closely articulated to the outside commercial 
world that it works with the utmost smoothness in relieving the busi- 
ness community of many of the uncertainties of business. 

The speculative exchanges furnish a continuous market in which 
all transactions can be liquidated during exchange hours. This 



394 MATERIALS FOR ELEMENTARY ECONOMICS 

important service makes Wall Street the center of the financial sys- 
tem, as it is the only place in which financial error may be atoned for 
and freely liquidated. It gives stability to the loan market, and 
renders possible the enormous business of lending upon stocks, 
securities, warehouse receipts, and other collateral, its excellence as 
an agency in facilitating this business being indorsed by the banks. 
The stock exchange does not cause panics, but saves us from the 
worse effects of them, as it bears the burden and takes the responsi- 
bility when the worst results of financial excesses are threatened. 

The exchange market, not only for commodities but for securities, 
furnishes the place where hedging in all its various forms may be 
best undertaken. It serves to knit together all business and gives 
a wide field to the principle of insurance. It is especially valuable 
in giving the small business house the necessary security in doing 
business, so that it may compete successfully with its larger rivals. 

The exchange gives free play to the modern principle of specializa- 
tion. It produces a world market where broad conditions are given 
due weight, and which serves as the basis of all markets, but it leaves 
to local influences the special task of adapting these world prices to 
the conditions of a particular place. The prices fixed upon the 
exchanges, from the broad vision of those who make them, serve well 
to direct commerce in its important divisions, and, in the course of 
trade as reflected in market quotations, a prophecy is given in regard 
to business conditions which it would be well for all to heed. The 
speculative process reduces costs and husbands resources, building 
up a stock of commodities for use in case of crop failure or other dis- 
aster. The means adopted to accomplish this purpose are of the 
most modern type. Publicity is a prominent feature; and the central 
idea in all the activities of the exchange is to give free play to com- 
mercial forces, to unite without restricting, to promote solidarity 
without crushing the individual. 

The fault which is most often found with organized speculation 
is that it favors short selling, and consequently many favor the aboli- 
tion of that practice. But it would appear that when the liberty either 
to buy or to sell according to the opinion of the trader upon the market 
is restricted, the idea of a free exchange has been lost sight of. For 
organized speculation exists in order to make prices ; and the principle 
upon which it is based is that the best method to give freedom in 
price-making is to afford the greatest facility to all parties to make 
such bids and offers as they wish. 



VALUE 395 

Prohibiting short selling will result in removing the most impor- 
tant check which keeps a bull market from rising to unreasonable 
limits, and moreover the result would be that when the market turned 
and everybody began to sell it would fall to unreasonable depths since, 
short selling having been prohibited, there would be no buying on 
the part of shorts seeking to cover. Thus a market where short selling 
has been prohibited is a one-sided market and such a market is one- 
sided going up and one-sided coming down. It is impossible to make 
the market so that all deals must in every case be purchases. By 
attempting such a thing the principal effect is to bunch the persistent 
buyers at one time and the persistent sellers at another. The only 
method by which this condition can be avoided is to permit such 
freedom in trading that selling and buying stand on the same plane, 
so that one may sell before he buys or buy before he sells with equal 
facility. 

If we go to the extreme of abolishing organized speculation alto- 
gether we may gain to the extent of checking one form of gambling, 
yet we should lose the many advantages obtained by organized 
speculation. It would result in prices being fixed in a crippled and 
restricted market, the transfer of risks by means of hedging to those 
who specialize in risk taking would be prevented and this would prove 
a special hardship for the small producer who is less prepared to meet 
such risks than the large producer, and finally, as experience in Ger- 
many and elsewhere has shown, such a measure would simply be 
evaded and in all probability cause more injury than benefit to the 
commercial world. 

The only alternative which would be acceptable to organized 
speculation as it exists today would be a reformed system which 
retained the essential features, but eliminated, so far as possible, 
the uncommercial practices which have such unwelcome prominence 
in large commercial exchanges. Institutions which have only the 
outward forms of exchanges should be dissolved or else made into true 
exchanges. Uncommercial practices and all manipulation should be 
discouraged or prohibited; and amateurism, the greatest cause of the 
evils of organized speculation, should be eliminated, even at the 
expense of much effort on the part of legislatures and of the exchanges 
themselves. 

The best method to pursue in discouraging the illegitimate use 
of organized speculation is to encourage its legitimate use. The 
idea should be instilled into the minds of traders that the exchanges 



396 



MATERIALS FOR ELEMENTARY ECONOMICS 



are places for the transaction of business, not for gambling or any 
form of robbery or extortion. No attempt should be made to force 
the amateur speculator or person of risk-taking propensities to avoid 
all risks, but he should be encouraged to take those which are necessary 
and for the good of the community, and so to educate himself in risk 
taking that he will cease to be an amateur. If the adventuring traders 
are led to substitute the necessary risks of commerce for their reckless 
gambling venture there will remain but little to make the service 
of the exchanges truly ideal. Most of the other reforms suggested are 
but methods of accomplishing this important one. In short, it is 
through educating the people in the proper use of organized speculation 
considered as a commercial instrument that reforms can best be 
accomplished. 

In effecting these reforms the difficulties of securing legislative 
action could be avoided if the better element, acting through the 
regularly constituted authority of the exchanges, were to pursue a 
consistent policy in the direction indicated. The measures taken 
should not proceed to startling lengths at first. It is only by gradual 
stages that an institution which has been perverted can be brought to 
its true and beneficent purpose. Speculation so organized that the 
transactions will be legitimate and perform a service offers the only 
acceptable alternative to the system of organized speculation as it 
exists today. ^ 



<- 



107. A COST DIAGRAM 

Selling price $775 

Total cost $675 

.Total production cost $625 ^1 



.^ Prime or direct cost_^i 
$400 I 



Direct 
Materials 

$200 



Direct 
Labor 

$200 



Production overhead 



Depart- 
ment 

Expense 
$100 



Factory 
Expense 



General 
Expense 

$50 



Selling 
Expense 



Profit 

$100 



VALUE 397 

This diagram serves to illustrate, by purely arbitrary figures, 
the component elements of cost. The illustration is applicable to 
a case where the plant is divided into factories and the factories into 
departments so that the overhead on a specific task is first appor- 
tioned on the basis of the work in a particular department ; the task 
then bears its proper proportion of the general expense in that factory 
and finally it is called upon to bear its proper share of the general 
expense of the whole plant. Finally selling expense is apportioned. 

io8. ITEMS ENTERING INTO COST' 

Let us consider, if you please, the cost of production from the 
manufacturers' standpoint. What is it and what does it involve and 
how shall it be handled ? There are four groups that enter into every 
factory cost: (i) the cost of labor; (2) the cost of material; (3) burden 
cost (or overhead charges) ; (4) selling cost. The aggregate of these 
four fixes the point per unit of product where profit begins. Let us 
discuss them separately. 

I. LABOR COST 

First, labor cost. In a modern industry this is often not the 
largest element in cost per unit of their product. In some industries 
it is rarely the largest element in unit cost. I am told that in an 
American locomotive the percentage of labor cost is 20 and that the 
percentage of material cost and of burden and overhead charges is 80. 

It needs only the statement to show that the important factor in 
labor cost is not the rate of wage, but the rate of output. It is not 
what you pay, but what you get for what you pay that counts. 

In an English factory I found a screw machine making bolts of 
various sizes, and a boy running it at a very small wage, probably 
about 2 shillings a day. I stood looking at the boy and his product; 
first, twenty ^-inch bolts, and then twenty-five ^-inch bolts, and then 
fifty |-inch bolts and then five or six i-inch bolts, and then back to 
quarter-inch. I went to the superintendent and said to him, "That 
boy is costing you more than a man who earns S3 a day would in one 
of our shops." He said, "Why?" I said, "His time is used in 
altering tools. He is 'breaking up,' as we say, altering his machine 
from time to time and stopping his processes 10 to 15 times a day." 

'Adapted from a speech by William C. Redfield in the House of Representa- 
tives, June 12, 1911. Congressional Record, 626 Congress, ist session, Vol. XLVII, 
Part II, pp. 1941-45. 



398 



MATERIALS FOR ELEMENTARY ECONOMICS 



He said, "What would you do ? " I said, " Give him one size and let 
him run all day on that. The next morning give him another size and 




let him run all day on that, and the next morning give him another 
size; do not stop your machines, but run them steadily on one size." 



VALUE 399 

One of the things I should like to burn into your thought is this — 
the essentially variable quality of cost. It can not be talked about 
as a fixed thing. Cost is everywhere and always variable, at every 
time and in every place. 

Output varies with the character of the workmen, the equipment, 
its arrangement, or other local conditions, with the nature of the 
superintendence, with the discipline, and so forth. It is absurd to 
assume that work done by a man paid $4 daily costs more per annum 
than work done by a man paid $2 daily. It may be more or less 
costly, and depends upon other conditions. Therefore, because cer- 
tain goods are produced at a certain labor cost per unit when the 
wage rate is $3 per day in a certain place, it can never be argued that 
the same wage rate on similar goods results in a like labor cost per 
unit in another place. It may vary from 10 to 50 per cent. To dis- 
cuss the wage rate as the controlling factor in labor cost per unit is 
both inadequate and misleading. The railroads are a very notable 
example of this. The English railways have vastly cheaper labor 
than we, but their freight charge per ton-mile is two and one-half 
times ours. With pride the Indian railway department told this last 
winter that, though their labor is one-eighth of ours in cost per day, 
they had succeeded in getting down to a trifle lower freight cost per 
ton-mile than we. They had been years at it, with labor one-eighth 
of ours, and had just succeeded. 

Now, the question as to a manufacturer's control of his labor cost 
apart from the wage rate I want to illustrate by examples. 

I know a factory in which the product was doubled in two years 
without adding a man or without adding a machine. And this is the 
way it was done: The men had been paid on day work. The labor 
men have, and they properly have, a horror of piecework, as it is 
commonly administered, because, I am sorry to say, manufacturers 
have so abused the piecework principle that the laboring men have 
justly come to fear it. As piecework is handled in most factories it 
ought to be hated, as it is hated, but in this particular factory the 
head of the concern got the idea that he could save by guaranteeing 
his men a high wage. He said, "We will guarantee your day rates; 
you shall always earn your present day's pay. We will also guarantee 
that your piecework rates shall not be cut. We will agree with one 
another that obvious mistakes will be corrected either way, but 
if you earn large pay, understand, your piecework rate shall not 
be cut." 



400 MATERIALS FOR ELEMENTARY ECONOMICS 

That factory operated upon that basis for many years. The 
wages of some men went up to $6, and in some odd cases even to $7 
a day. Now, when the men were guaranteed an unlimited earning 
rate, see what happened. The manufacturer said, "There is the 
machine. There is your power. Go ahead. Earn all you can." 
Naturally, the first result of that was largely to increase the product. 
Then three other things happened. The manufacturer went to a 
man and said, " Pat, you are earning pretty good wages. It does not 
make any difference to me what you earn. The more you earn the 
better for us both. But there is one thing you can not afford, and 
that is to have your machine shut down for repairs. It hurts me, 
and it hurts you every hour that that machine is idle, and your 
machine is of that particular kind and engaged in that particular work 
that knocks it to pieces if it is not properly taken care of. Every 
hour it is delayed in operation it hurts both you and me." Says Pat, 
" What is it that you want ? " "I want you to spend about 1 5 minutes 
before work starts every morning in overhauling that machine in your 
own interest. Do not let it get into such shape that it will need 
repairs." 

I cannot tell you the exact number of thousands of dollars per 
annum that was saved in that factory in that simple way, but it was 
several times $10,000 a year, just that item of examining carefully 
the machines every morning before beginning regular operations. 

In the next place, the system of using fuel had been more or less 
careless in this shop. The manufacturer went to his workmen and 
said to them, "Boys, you are not going to be cut, no matter what you 
earn. You cannot afford to waste time in firing improperly. You 
must be careful." His men did as instructed. At the end of three 
or four weeks about an hour and a quarter's time was saved each day, 
amounting to one-eighth of the operating time of that part of the 
plant, besides a saving of fuel. 

In most factories the element of defective goods is a large element 
of cost. This manufacturer went to his men and said, "Boys, you 
are well paid. There is no limit, practically, to what you can earn. 
But it is not fair on that basis to make any bad goods." The men 
thought the matter over among themselves, and finally they came 
to him and said, "What is it you want?" and he said, "I want you 
to replace the bad goods on your own time and to replace the ma- 
terial that you waste." And right there was saved several thousand 
dollars more in the course of a year. 



VALUE 401 

In those ways, without touching the rate of wage, the output of 
that factory went up double in two years; and the same thing, to a 
greater or less degree, depending upon different circumstances, is 
possible everywhere. But someone will say about the case I have 
quoted that there must have been lax management theretofore. I can 
assure him that was not the case. 

Labor cost per unit varies with time and place, and in the same 
shop is constantly changing. It is unlike in each of several mills 
producing the same goods, belonging to the same company. A 
superintendent who would take three mills making the same goods, 
under the same ownership, in three different cities, and get the cost 
alike would be a wonder. For example, I have in mind two factories, 
belonging to the same concern, where for two years it has been a 
constant effort to get the costs alike in making the same goods. But 
what are you going to do when in one factory power costs three times 
as much as it does in the other ? 

Labor cost is affected by sanitary and climatic conditions. It 
varies with the quantity and the quality of the output, and it can 
never be assumed that it is at the close of the year what it was at the 
beginning of the year in the same shop. It is enormously modified 
by the progress of invention. The labor cost in your shop in January 
may be in some respects entirely wiped out by July. The labor cost 
in July may be entirely altered by December; else what is your pur- 
chasing agent for, and for what purpose are you feeling out all over 
the world for the latest machinery ? 

Labor cost varies with the arrangement of machinery within the 
shop. It is affected by the space available. It varies with changes 
in material, with the sufficiency and the regularity of the supply of 
material and its suitability to the work. And the labor cost of 
Monday when the stock runs out Monday afternoon and new stock 
comes in Tuesday is not the same on Tuesday that it was on Monday. 
The steel mill may have made an error and your labor cost go flying 
up for the time. And I am speaking now, gentlemen, from an expe- 
rience in figuring labor costs to hundredths of a cent per unit. 

Labor cost is affected by the lighting and the power equipment of 
the shop, and will change with the going of one superintendent and the 
coming of another. I am sure I need only to say these things one after 
the other to have their entire reasonableness made plain to you all. 

Labor cost will alter radically within a month, by the introduction 
of new tools, new machinery, or the change of a process, even to the 



402 MATERIALS FOR ELEMENTARY ECONOMICS 

extent of having a whole process eliminated. It varies with the 
wastefulness of material used in producing an article, excessive use 
of supplies, the loss of time and material occasioned in making 
defective goods; and every one of these items has to be carefully 
watched by any alert manufacturer. 

The labor cost is affected by methods of paying (by piecework on 
a righteous basis, and by day's work on an unrighteous basis) and by 
a just and considerate application of the methods of paying apart 
from the amount paid. 

Labor cost is, therefore, a variable element. It cannot be 
measured by any fixed standard. 

But labor cost in any factory is both direct and indirect, as will 
be made plain; upon the proper adjustment of one to the other 
depends in a degree the labor cost. 

II. MATERIAL COST 

Reaffirming, therefore, that in many industries the unit cost of 
labor is not the largest element of the total unit cost, but may be a 
small percentage thereof, we pass to consider the cost of material. This 
is the most fixed of all the elements of cost, but only a little thought 
is needed to show that this, too, is variable. In two shops, one buying 
in large quantities and the other small quantities of the same goods, 
the price of the material will vary. In two large shops which buy 
the same quantity, but have buyers of different skill and differing in 
amount of free capital with which to purchase, the cost will vary. In 
two shops in the same business, but located differently with respect 
to transportation, the cost will vary. Within the shops the cost of 
material will vary with the handling facilities provided, and with the 
space available for storage. The cost of material will vary with the 
system of receiving the same and storing it. The cost of material 
must always include such important and variable items as freight, 
cartage, wharfage, demurrage, and the like. 

The cost of material must always include the wages of the store- 
keeper and a share of rental for the space occupied by it. The cost 
of material will vary also with such depreciation as will take place if 
it is not protected against loss. This, therefore, though relatively a 
fixed quantity, is variable, so that in different shops, in the same line 
of business, it cannot be argued that the net material cost in one 
even approximates that in another. 



VALUE 403 

The cost of material must include the factory supplies, the pur- 
chase, keeping, and management of which is an important and com- 
plex element of cost where thousands may easily go out of sight. 
Consider what it may mean to have one purchase of bad lubricating 
oil. Its use on valuable and delicate machinery may cause the loss 
of thousands of dollars in a week. 

But when the variable items of unit cost of labor and material are 
combined you have only obtained what is known as prime cost, or 
actual outlay, and have still to consider two serious elements in cost, 
each of which sometimes amounts to a larger total than either labor 
or material, and sometimes exceeds both. 

III. OVERHEAD COST 

We therefore take up, third, cost of burden or overhead charges. 
This is often ignored or not appreciated at true value. More concerns 
are wrecked by failure to estimate or manage it properly than by any 
other single cause save perhaps insufficient capital. 

Among the items covered in burden cost are such as these: 
Taxes and assessments, repairs to buildings and machinery, indirect 
labor, superintendence, experiments, insurance and fire protection — 
two different things — depreciation, bad debts, accidents, interest and 
discounts, power, heat, and light, and legal expenses, every one of 
them matters needing the most careful attention, if they are to be 
kept within reasonable limits. 

A large concern located on expensive land in a city with high rates 
of assessment and taxes may bear a burden in this single respect 
enough to pay a profit on the entire investment of a small concern 
more favorably placed; but, as showing the complex nature of this 
problem, the same concern may, by reason of its equipment and its 
efficient organization, produce goods, though paying the same or 
higher wages, so cheaply as to overcome this handicap. 

Repairs vary with the character of the buildings, their age, their 
location, with climate, and with respect to machinery, with the care 
given to it. In some industries this item of repairs is very large. 

Indirect labor is an unfortunate necessity in every industry. A 
cotton mill employs carpenters and steam fitters, whose presence is 
necessary, but whose expense is a burden on the output. Every 
modern shop has to have a tool room. This question of indirect cost 
is often a very serious one, and is a matter requiring the closest pro- 
fessional study. 



404 MATERIALS FOR ELEMENTARY ECONOMICS 

The cost of superintendence is apt to be heavy in proportion as 
the labor is cheap. I was very much interested in what the gentle- 
man from Connecticut said about the jute mills in Calcutta in his 
recent address, because only eight weeks ago I was in those jute mills 
talking with the superintendent. I find it a very excellent plan, if 
you wish to get at the details of a factory, to avoid the owner. I 
asked this gentleman in this large jute mill about the question of his 
labor. He said it was cheap, very cheap. I said, "Is it wasteful?" 
He answered, "Extremely wasteful." I asked him in what other 
respect it was bad, and he said it was bad in the respect that it required 
an unusual amount of European superintendence — three to four times 
as much as they would give in Scotland. 

Experiments looking toward new or better output, tools, or 
machines are a very expensive item in many factories. It is hardly 
necessary to say that insurance varies. An old wooden mill must 
charge the cost of its output with many times the unit cost for insur- 
ance that is borne by goods produced in modern so-called slow- 
burning buildings. The actual loss from fires, over and above that 
covered by insurance, is a part of the burden cost frequently for- 
gotten and of uncertain amount, but often serious. Depreciation is 
a large item of cost, amounting often to as much as lo per cent per 
annum of the entire value of the machinery, buildings, and other 
equipment, varying with conditions. Sometimes neglected by manu- 
facturers, it forms a burden of a self-enforcing character, which, if not 
reckoned as an annual addition to the burden cost, will come in a 
lump sum whenever machinery or buildings must be replaced. The 
loss arising through machinery thrown out of date by new inventions 
is a serious part of burden cost frequently forgotten. The loss arising 
from the continued use of antiquated and slow-producing apparatus 
is another large part of burden cost. 

This question of slow-producing apparatus is sometimes by itself 
alone very serious. I recall one large sugar refinery in New York 
City that closed on that account alone. I recall another where the 
single item of cartage was so great it had to go out of business. 
I recall three woolen mills that stood idle for years because their 
machinery was out of date and they would not replace it, and another 
that was idle and stood idle because it was three miles from a railroad 
and the cartage killed it. Those are the things that do it, and not 
the difference in the wage rate. 



VALUE 405 

The losses from accident are a constant terror to every manu- 
facturer, and yet I stood, within the last few weeks, in a factory 
claiming high protection at our hands here, which could have made 
a profit by saving in handling charges alone, but which stood to lose 
— for lack of care for human flesh and blood, and because of failure 
to properly protect its machinery — thousands of dollars every y^r. 

The loss arising from bad accounts is present in every business, 
and varies with the care in selling goods. 

The burden charge arising from interest and discounts varies with 
the amount of free capital available in the business. I do not refer 
to the interest upon bonds or the interest on the total investment, 
with which some concerns charge themselves as an expense, but rather 
the interest that is to be paid upon real estate mortgages and upon 
money borrowed to supply working capital and for discounts allowed 
customers for prepayment. 

Power, heat, and light vary greatly. The source of power is so 
variable that no general statement can be made. For example, 
power from water, from steam, from electricity, or from gas engines. 
I am interested in two concerns using electric power largely. One 
pays 5 cents per kilowatt hour, taking it from steam; the other i^ 
cents a kilowatt hour, taking it from water, a difference of over 300 
per cent in the power rate. 

It will be seen that the item of burden cost is one of importance 
and difficult to define. It is one in which every manufacturer is very 
closely interested, because it very often affects the cost of his pro- 
duction far more than the rate of wages that he pays. Manufac- 
turers, however, are very apt to assume the burden cost to be less than 
it is. Instead of making a careful study of it, they take what seems 
to be the obvious course, of reducing the pay roll, instead of the more 
economical course of studying closely their burden charges. Once 
my partner said to me, ''Although your department of this business 
is not the factory, I want you to go into it every day for an hour or 
two, simply to find what is wrong." And for ten years I never went 
a day that I did not find something that could be bettered. 

Who shall calculate accurately the difference in labor cost in a 
large factory between the output of a force of, say, 1,000 mechanics, 
well paid, well equipped, well housed, with ample light and power, 
with machinery well arranged, with material exactly suited to their 
purposes, with management that wins the loyalty and enthusiasm of 



4o6 MATERIALS FOR ELEMENTARY ECONOMICS 

the men by liberal pay and just treatment, and the output of an equal 
force of men working in poor light, with variable, insufficient power, 
poor equipment, with wages cut to the smallest limit, with improper 
sanitary conditions and harsh treatment ? 

The difference between the output under above conditions may 
be the difference between ruin and dividends. You cannot confine 
human nature within the limits of a wage rate. Wholly outside of 
the rate of pay there is unlimited scope for brains in manufacturing. 

IV. SELLING COST 

But in all this we have merely produced our goods and laid them 
at the factory door. They are not yet sold, and before their sale takes 
place another serious element of cost must be added. Therefore we 
must discuss selling expense. This selling expense is sometimes as 
large as the entire cost of labor, material, and burden. 

I have only to mention to you what it costs to sell automobiles in 
order to get your immediate assent to that. Selling cost includes 
such items as traveling expenses, commissions, advertising, office 
salaries and rental, postage and stationery, packing and shipping 
expense, office equipment, office heat and light, and similar items. 
I need only mention these to show at once that they are of a very 
variable character. In some lines the cost of advertising alone is 
equal to the combined cost of all things else put together. In some 
industries traveling expenses are a very heavy item. Ofiice expenses 
are very high in other industries, and in others office expenses might 
well be greater if they would so insure the ascertainment and reduction 
of burden cost. 



VALUE 407 

109. ANALYSIS OF THE RETAIL PRICE OF EGGS IN 
NEW YORK CITY' 

The various items of expense to be included under middleman 
charges for the handling of eggs in New York City have been set forth 
in a report recently issued by a committee of the New York State 
Food Investigating Commission, and are indicated in the following 
table which is quoted almost exactly. This table is supposed to show 
the accumulation of charges on eggs based on a hypothetical basic 
price of twenty cents per dozen. 

Producer's price $0.20 $0 . 20 

Shipper's charges: 

a) Labor in collection and packing 005 

b) Cases, fillers, and packing 0073 

c) Transportation charges to city 0106 . 023 

Commission for handling 01 .01 

Jobber's charges: 

a) Cartage from dock to store 00133 

b) Candling and grading 00666 

c) Storage and insurance 016 

d) Jobber's profit and charges 01 

e) Delivery to the retailer 004 . 038 

Retailer's charges: 

o) Operating expenses, 10 per cent 0271 

b) Retailer's profit, 5 per cent 01497 042 

Price paid by consumer $0. 313 

' From C. W. Thompson, "Technical Studies in Egg-Marketing," Agricultural 
Experiment Station Bulletin 132, The University of Minnesota (1913), p. 38. 



4o8 



MATERIALS FOR ELEMENTARY ECONOMICS 



no. MIDDLEMEN'S CHARGES IN MARKETING AGRICUL- 
TURAL PRODUCTS' 



Product 

Apples 

No. I Baldwin 

Apples 

Extra fancy Jonathan 

Apples 

Best No. I Baldwins 

Apples 

Jonathan 

Apples 

Milk 

Milk 

Milk 

Cal. Oranges 

Alta Crestae (navel) 

Cal. Oranges 

Ruby Bloods 

Oranges (navel) 

Peaches 

Peanuts 

Potatoes 

Cal. Potatoes 

Oregon Stock 

Dressed Poultry 

(Broilers) 

Dressed Poultry 

(Roasters) 

Poultry 

(Capons) 

Poultry 

(Fowls) 

Rice 

Strawberries, No. i . . 

Tomatoes 

Tomatoes 

Dressed Turkeys 

Milk (in spring) 

Potatoes 



Where Produced 



Marlboro, 
Mass. 

Wenatches 
Valley, Wash. 

Maine 



No. Yakima, 
Wash. 

Maine 

Montgomery 

Co., Pa. 
Middlesex and 

Worcester 

Co., Mass. 
Worcester Co., 

Mass. 
Bonita, Cal. 



Bonita, Cal. 

California 

Paonia, Cal. 

Virginia 

Aroostook Co., 

Me. 
California 

Eastern Mass. 

Eastern Mass. 

Eastern Mass. 

Eastern Mass. 

Arkansas 

Georgia 

Florida 

Mt. Holly, N.J 



Northern New 

York 
Cooperstown, 

N.Y. 
Mass. 



Where Con- 
sumed 



Boston 

Chicago 

Liverpool 

Boston 

Portland 

Philadelphia 

Boston and 
vicinity 

Boston 

Boston 

Boston 

New England 

Denver 

Boston 

Cambridge, 
Mass. 

San Fran- 
cisco 

Boston 

Boston 

Boston 

Boston 

Boston 
Boston 
Boston 

Philadelphia, 
N.E. sec- 
tion 

Boston 

New York 

City 
Cambridge 



Price Re- 
ceived by 
Producer 



$2.25 (bbl.) 



1.45 (box) 

4.00 (bbl.) 

1 . 66 (box) 
(90-100 ap- 
ples) 
2.00 (bbl.) 

.03! (qt.) 

.04 (qt.) 

.02J (qt.) 
I. 61 2 (box) 

Loss .068 
(box) 

07 (box) 

24s (box) 

045 (lb.) 

so (bu.) 

70 (sack) 
(2 bu.) 

33 (lb.) 
I9i (lb.) 
22? (lb.) 
16 (lb.) 

40 (bu.) 

08-. 14 
(box) 
35 (crate) 

3775 
(basket) 

25 (lb.) 

025 (qt.) 

SS (bu.) 



Price Paid 
by Con- 
sumer 



$7 . so (bbl.) 

8 . 00 (box) 

6.42 (bbl.) 

3.60 (box) 

6.00 (bbl.) 
.08 (qt.) 
.10 (qt.) 

.08 (qt.) 
3 . 50 (box) 

2.00 (box 

3.00 (box) 
•75 (box) 
.18 (lb.) 
.90 (bu.) 

1 . so (sack) 

.55 (lb.) 
.33 (lb.) 
.35 (lb.) 
.28 (lb.) 

4.r6| (bu.) 

■15-25 
(box) 

2 . 10 (crate) 



.38 (lb.) 
.08 (qt.) 
.90 (bu.) 



Differ- 
ence 



55- 25 

6.5s 

2.42 

1.94 

4.00 
■04! 
.06 

.051 
1.888 

2.068 

1-93 
.505 
• 13s 
.40 
.80 

.22 

■ I3I 



.12 

3.76! 

.07-. II 
1-75 

.4225 

.13 
• OSS 
•35 



'Adapted from T. N. Carver, Principles of Rural Economics, pp. 33o~33- 
Ginn & Co., 191 1. 



VALUE 409 



Where Does the DiflEerence Go? 



Picking, $0.25; barrel, $0.25; freight, $0. 25; commission, $0.25; sorting, $0. 15; labeling, cart- 
ing, etc., $0.10; storage, $0 . so; wholesaler, $2.00; retailer, $1 . so 

Growers' Association, $0.10; railroad rate to Chicago, $0.50; wholesaler, $2. 4s; retailer, $3.50. 

Barrel, $0.35; freight, commission to exporter, salesman, etc., $1 .00; retailer, $1 .07 

Growers' Association $0.09; freight, $0.50; refrigerating, $0.10; expressage, $0.03; wholesaler, 
$0.12; retailer, $1 . 10 

Broker, $0.50; commission man, $1.50; retailer, $2.00 

Freight, $o.oo|; retailer, $0.04 

Freight, icing, bottling, $o.oo|; wholesaler, $o.o2|; retailer, $0.01; delivery, $0.02 

Transportation, $o.ooj; contractor, $o.o2|; peddler, $0.02 

Picking, packing, etc., $0. so; freight, $0,828; auction commission, $0.06; retailer, $0 . 50 

Picking, packing, etc., $0.50; icing, $0.21; freight, $0,828; auction commission. $0.03; retailer, 
$0.50 

Packing and selling, $0.40; freight, $0.83; half-refrigeration, $0. 10; local dealer, $0.60 

Commission, $0,045; cost of box, paper, and packing, $0.14; wholesaler, $0.20; retailer, $0.12 

Freight, $0,002; wholesaler (including packing), $0,018; retailer, $0,115 

Bagging, $0.01; freight, $0 . 1 2 j ; wholesaler, $0 . 064; hauling to Cambridge, $0 . 03 ; retailer, $0.17 

Freight, $0.10; commission agent, $0.26; wholesale and retail dealer, $0.44 

Shipping and selling commission, $0.05; wholesaler (including cost of dressing, shrinkage etc.), 
$0 . 07 ; retailer, $0.10 

Shipping and selling commission, $0,041; wholesaler (including cost of dressing, shrinkage, etc.), 
$0.04; retailer, $0.05 

Shipping and selling commission, $0.03?; wholesaler (including cost of dressing, shrinkage, etc.), 
$0.04; retailer, $0.05 

Wholesaler (including cost of dressing, shrinkage, etc.), $0.07; retailer, $0.05 

Milling, $0. 231; miller's profit, $o2ii; wholesaler's expenses, $015; his profit, $1 .00; retailer's 

expenses, $0. i6j; his profit, $2.00 
Cost to land them in Boston, $o.o3-$o.05 

Railroad rate, $0.62; cartage, $0 . 03 ; shipper, $0. 10; commission merchant, $0.05; packing, boxing 

etc., $0.35; jobber, $0.15; retailer, $0.45 
Freight, $0.05; commission agent, $0.0225; wholesaler, $0. 15; retailer, $0 . 20 

Local agent, $o.oii: boxing and packing, $0.01; railroad rate, $0.01; big dealer, $0.01 j; retailer, 

$0.08 
Local haul, $0,001; shipping, $0,009; freight, $0,005; wholesaler (who is also the distributor), $0.04 

Packing, $0.02; commission, $0.03; railroad transportation, $0.05; retailer, $0. 25 



4IO MATERIALS FOR ELEMENTARY ECONOMICS 

III. COSTS IN THE RETAILING OF SHOES' 

Gross profit so far encountered ranges from 20 per cent to 42 per 
cent of the net sales,' according to the grade of goods and with almost 
exactly the same number above 30 per cent as below 30 per cent. 
The Bureau of Business Research is inclined to think that under 
present conditions the typical gross profit of shoes retailing at or under 
$3 . 50 will be found to run from 23 per cent to 25 per cent and for 
those retailing above that price a percentage of from 30 to 33 is the 
type. 

Gross profit as treated above includes discounts. 

Total operating expense so far encountered ranges from 18 per 
cent, or possibly a little less, to 35 per cent of the net sales in going 
concerns. The figures as a whole center about 24 per cent, that is, 
about as many are above as below 24 per cent, with the operating 
percentages of medium-grade stores centering around 23 and of 
higher-grade stores around 27. 

Freight and cartage is not included in the above operating expense 
percentages, as it is deducted from the merchandise statement. Nor 
is interest included, which is deducted from net profit. 

Buying expense is an item kept by scarcely any but department 
stores, and with them it is seldom a true buying expense, because the 
buyer's salary or commission usually includes services for selling or 
the directing of selling and also for management. 

It is interesting to note, however, that we have found a tendency 
for estimates of time devoted to buying (which includes the looking- 
over of stock records and of size-up sheets as well as the inspection of 
samples) to center about certain proportions according to whether in 
a rough way the yearly sales are above or below $50,000. With the 
proprietor's or manager's salary or drawings distributed in the same 
proportion, a surprisingly uniform percentage of buying expense 
results, no matter what the sales or the expense may be. 

This percentage ranges from 0.8 to 1.8 of the net sales. The 
Bureau has percentages ranging from 0.3 to 3.1, but the minimum 
does not comprehend the full buying expense as defined above, and 
the maximum is for department stores and not comparable for reasons 

' Adapted from the Bulletin of the Bureau of Business Research of Harvard 
University, No. i, May, 1913. This bulletin is a preliminary report. The Bureau 
regards the findings as tentative in some particulars. 

' "Net sales" means gross sales less returns made by customers and allowances 
made to them. 



VALUE 411 

already noted. The figures at present seem to center about i . i per 
cent, with a marked concentration of them between i . o per cent and 
1 . 3 per cent. Some interesting comparisons could be made with some 
department-store buying expense figures in their shoe departments. 

The very mention of the item, selling expense, is almost a sufiicient 
argument for the necessity of a uniform accounting system — so many 
opinions prevail as to what constitutes selling expense. While the 
boundaries between buying, selling, and management are not clear and 
distinct but shade into each other, the main elements of each of these 
can be distinguished according to sound theory and practice, and if 
those nearer the line have to be divided somewhat more arbitrarily, 
just as in certain railroad accounting items, it is vastly better to do 
so when the advantages of accurate comparison are considered. 

The percentage of salaries and wages of the sales force has been 
encountered ranging from 5.0 to 10.3. Percentages as low as 4 and 
as high as 13 have been eliminated because of doubt of their being 
genuinely comparable and because of insufficient opportunity to verify 
their accuracy. There appears a marked concentration of the figures 
between 7 per cent and 8 per cent in cities of more than 100,000 
population. It is sufficient indeed to point to a standard of 7 per 
cent. It may be possible to attain 6 per cent in cities of this size. 
The Bureau has eleven percentages running between 6 and 7 but in 
the light of its present knowledge 6 per cent would be very thoroughly 
investigated before being accepted. 

Advertising with its definition as standardized by the Bureau's 
system has been found ranging from o . o per cent to 8 . 8 per cent, with 
a tendency to center about 2 . o per cent with the greatest concentra- 
tion between i per cent and 2 per cent. 

Delivery expense has been found to date ranging from practically 
o . o per cent on the lower-priced stores to i . 4 per cent on the higher- 
priced stores. The figures of the stores making deliveries center 
around 0.6 per cent, with a marked concentration between 0.4 per 
cent and o . 6 per cent of the net sales. 

Rent has furnished the greatest variation of all, namely, from i . 8 
per cent to 14.6 per cent of the net sales in going concerns. Despite 
this rather astonishing range, a distinct tendency is encountered for the 
figures to center about 5 per cent, as many being above that percent- 
age as below, with three-fifths of them all falling between 3 per cent 
and 7 per cent. Between 3 per cent and 4 per cent alone, however, 
there is sufficient concentration of percentages to warrant the sugges- 



412 MATERIALS FOR ELEMENTARY ECONOMICS 

tion of not only 5 per cent as a typical figure, but 3 per cent as a stand- 
ard to be aimed for. So that, for example, a dealer who found his rent 
percentage 7 would know not only that 5 per cent was a more normal 
figure but also that 3 per cent was by no means an unattainable figure. 

On rather limited data, so that it must be stated tentatively, it 
yet begins to appear as if the rent item fell off markedly in importance 
in towns of less than 100,000 population. 

It has been urged upon the Bureau from weighty sources that the 
rent and advertising items should be considered together, because of 
the advertising element involved in a location of high rental. 

This seems plausible, and the Bureau is watching for any apparent 
connection between the advertising and rent expense. As yet no 
direct relation appears. High rent percentages with low advertising 
percentages have been encountered, but in no marked degree more 
than high rent percentages with high advertising percentages. 

Decidedly the general practice is to charge interest on borrowed 
capital only. That on capital invested has been added by the Bureau, 
and since the sum of both is deducted from the net nominal profit to 
secure the final net profit, it is not treated as an expense. 

The interest figures thus made up have ranged from i . o per cent 
to 7 . 9 per cent but have centered around 2 . 5 per cent and concen- 
trated between 2 . o per cent and 2 . 5 per cent of the net sales. 

The number of stock-turns has a range so far in our data of from 
I . o to 3 . 6 times. It seems to center about i . 8, and a sufficient num- 
ber have stock-turns of 2 . 5 to warrant accepting that as a realizable 
standard. That is, a shoe store has been encountered whose stock 
turned over no more than once in a year, and another whose stock 
turned as many as 3 . 6 times. The majority, however, turned their 
stock more than i . 8 times, but less than 2 . o times. 

It is probably scarcely necessary to call attention to the public 
importance of this item of stock-turn. Imagine in the roughest kind 
of a way the millions of capital that could be released from investment 
in merchandise should the retailer increase his stock-turns but once. 
The bearing of this, furthermore, upon the demand for higher profit per 
pair, now rather prevalent, may also be seen. More stock-turns mean 
an increase in net profit without any raising of the price per pair. 

The annual sales of the average salesperson have been obtained 
by dividing the annual net sales of a concern by the average number 
of regular salespeople, certain rough but fairly well-tested equivalents 
being adopted for the extra salespersons. 



VALUE 



413 



The averages encountered to date range from sales of $5,000 per 
salesperson per year to $16,500, centering about $10,000. It should 
be remembered that our data are still preponderantly from the large 
cities and very likely raise this central average. In the cities under 
50,000 and in rural communities it is expected to run considerably less. 

The number of salespersons should form one of the first rough tests 
of the efficiency of a retail shoe concern, and in the large cities the 
above figure of $10,000 annual sales per average salesperson will be 
found not far wrong, with possibly a reduction to $8,000 for suburban 

Summary Table of Percentages of Given Items to Net Sales 



Item 



Lowest 
Percentage 


Highest 
Percentage 


20 


42 


18 


35 


0.8 


1.8 


50 
0.0 


10.3 
8.8 


0.0 
1.8 


1-4 
14.6 


I.O 


7-9 



Percentage about 

Which Data Center 

(Not an Average) 



Percentage about 
Which a Concentra- 
tion is SuflBcient to 
Indicate a Reali- 
zable Standard 



Gross profit, including 
discounts 

Total operating expense 
not including freight 
and cartage and inter- 
est 

Buying expense 

Sales force 

Advertising 

Deliveries 

Rent 

Interest 

Stock-turns 

Annual sales of average 
salesperson 



/Low grade 23-25 
\High grade 30-33 



/Low grade 23 
\High grade 2 7 

1 .1 

8.0 

2.0 

0.6 

50 

2-5 



Low grade 20 
High grade 25 



1 .0 

7.0 

1-5 
0.4 
30 

2.0 




2.5 



stores. Again may be noted the same variations in speed of marketing 
mentioned under stock-turns. For example, the salesperson of men's 
shoes can attain a higher average than the salesperson of women's 
shoes. The figures as given, however, are for stocks as a whole. 

It should further be remembered that the extremes above given 
are in themselves averages and not the record of any individual sales- 
person. Certain individual sales records of $30,000 and above have 
been encountered, but no averages approaching that. 

Where rents are high absolutely, that is per square foot, the sales- 
person's average also rises, as would be expected, indicating the 



414 MATERIALS FOR ELEMENTARY ECONOMICS 

advantageous site in a dense traffic zone. For example, the high 
average of $16,500 above was reached on one of the following great 
business thoroughfares: Broadway, New York; Chestnut Street, 
Philadelphia; and State Street, Chicago. But the increased volume 
of sales does not seem to keep the rent expense from ranging from 8 
per cent to 12 per cent in some of these cases. 

The table on p. 413 condenses the essential facts of the foregoing 
paragraphs. 

112. PRICES TO THE SMALL PURCHASER^ 

The poor must buy everything at retail. They are, therefore, 
greatly handicapped in securing full value for their money in their 
various purchases of supplies. "The poor housewife knows what good 
bargains are, but the meagerness of her purse oftentimes prevents her 
from purchasing supplies except in very small quantities. She goes 
to the grocery store and buys a single bar of soap for five cents, know- 
ing very well that she could get six bars for a quarter, and that if she 
should buy six bars she would save five cents; but, perhaps, if so much 
is spent for soap there will not be enough for food. She is buying 
potatoes at the market. For her large family a bushel of potatoes 
would not be an oversupply and that quantity can be bought for a 
dollar; but the outlay of a dollar for potatoes may not be possible. 
Instead of spending a dollar for a bushel she spends eight cents for a 
quarter of a peck, paying at the rate of $1 . 28 a bushel, losing nearly 
30 per cent by the transaction. Three cans of tomatoes can be bought 
for 25 cents, but she has only enough money for one can, and for that 
she pays 10 cents, perceiving clearly as she does that for every five 
cans purchased in this way there is a clear loss of one can. She has 
gone the rounds of the market and has nearly finished her purchases, 
but there are still butter, sugar, coffee, and salt to be bought, and 
besides some matches are needed. For all these things she has 25 
cents remaining. Butter is 30 cents a pound; sugar, 5 cents; coffee, 
15 cents; salt, 5 cents a large sack or 3 cents a small sack (the latter 
being half as large as the former); matches 3 boxes for 5 cents or 
2 cents a box. The purchase of a pound of butter cannot be thought 
of. The purchase of a half poimd would leave but 10 cents for sugar, 
coffee, salt, and matches. If all these desired articles are to be 
bought, the remaining 25 cents must be skilfully spent. Practice has 

' Adapted from F. H. Streightoff, The Standard of Living among the Industrial 
People of America, pp. 154-59. Houghton MifSin Co., 1911. 



VALUE 415 

taught our housewife the art of making skilful divisions. She buys 
a quarter of a pound of butter for 8 cents, a half-pound of sugar for 
3 cents, half a pound of coffee for 8 cents, a small sack of salt for 3 
cents, a box of matches for 2 cents, and has i cent left with which 
to buy an onion for the soup. She has lost heavily on every one 
of these articles, including the onion, and she knows she has 
lost.'" 

Besides these routine losses, the poor encounter other commercial 
disadvantages. One of these is the apparent necessity of buying on 
the instalment plan. It is certainly true that many an article would 
never be purchased at all were it not for this system, yet the buyer 
has to meet enormous overcharges on everything thus obtained. "A 
dollar or more is lost on a coarse blanket, two or three dollars on an 
almost worthless rug, twenty or thirty dollars on a sewing machine." 
In addition to the financial wastefulness of such a method of acquisi- 
tion, there is a moral evil. To be always in debt for something is not 
wholesome, neither is it elevating to feel that one does not own all 
the furniture in the house, and that, unless payments are made 
promptly, the goods will be forfeited and all that has been paid for 
them utterly lost. On the other hand, it is even more degrading when 
the housewife yields to temptation, and so discourages the collector 
that he gives up his visits before the full sum has been paid. In 
spite of its perniciousness, however, instalment buying cannot be 
absolutely and indiscriminately condemned. 

The very poor lose heavily in all their transactions involving 
money. The poor man's dollar does not bring him so much as the 
rich man's dollar, although it is very much harder to earn. 

113. PACKAGE GOODS^ 

The consumption of various food products specially prepared and 
distributed in packages of various sizes has increased enormously 
during the last decade. While these packed goods are undoubtedly 
wholesome, convenient, and attractive, they nevertheless as a rule 
cost more to the consumer than does the same quantity of food pur- 
chased in bulk. Indeed, the consumption of package goods under 
present conditions involves a large amount of waste in the expenditure 

' S. E. Forman in the Bulletin of the United States Bureau of Labor, No. 64. 
^ Adapted from the Report of the [Massachusetts] Commission on the Cost of 
Living (1910), pp. 340-46. 



4i6 MATERIALS FOR ELEMENTARY ECONOMICS 

of income. The habit makes for increasing comfort, pleasure, and 
luxury in the household, but it adds heavily to the expense of living. 

The practice of bujdng package goods, instead of purchasing the 
same food products in bulk, involves a threefold addition to cost: 
(i) the packages are frequently short in weight, and the purchaser 
often, if not usually, pays higher for the food value that he obtains 
than if he bought in bulk; (2) he has to pay for the extra cost of 
fancy packing and of distribution in small quantities; (3) as most of 
the package foods are heavily advertised, the consumer has to pay 
also for this expense. It is not implied here that the consumption of 
package foods should be discontinued altogether, and the old method 
of bulk purchase adopted exclusively. Consumers, however, should 
be made thoroughly acquainted with the fact that certain abuses have 
developed in connection with the purchase of the package foods, 
which reduce the amount of food value received for a given expendi- 
ture of money 

It appears, for example, that one brand of oats in packages costs 
7 . 57 cents per pound, in bulk 3 . 3 cents per pound; bacon in glass jars 
57 .6 cents per pound, sliced but unpacked 35 cents per pound; corn 
meal in packages 5.6 cents per pound, in bulk 2^ cents per pound; 
graham crackers in packages 18 cents per pound, in bulk 15 cents per 
pound; cheese biscuit in packages 30 cents per pound, in bulk 20 
cents per pound. 

.... In defense of the package goods, it is contended that this 
method of bringing goods to the consumer is more convenient and 
sanitary than the method of bulk sale. The package keeps out the 
dust, dirt, and germs that otherwise would get into the food through 
the handling by dealers. Undoubtedly, the package method has a 
real advantage in its favor in the matter of cleanliness and neatness. 
The goods are usually prepared, also, in pecuHarly attractive and 
appetizing style. The small grocery is often not notable for its 
sanitary and aesthetic appointments, and goods sold there under the 
conditions that existed in connection with the old practice of bulk 
purchase were often unwholesome and dangerous to public health. 



VALUE 



417 



114. VARIATIONS IN COST OF PRODUCTION AMONG DIFFER- 
ENT NEWS-PRINT PAPER ESTABLISHMENTS' 

The 38 mills in the United States produced 940,478 . i tons of paper 
in the schedule period, at a total cost of $30,921,400.39, or an average 
total cost of production of $32.88 per ton. The lowest total cost in 
any one mill was $24.50; the highest, $43. The range in cost of 
ground- wood pulp per ton of finished paper is from $8. 26 to $18.54, 
with an average for all of $13 . 27 ; for sulphite pulp the range is from 
$6 . 45 as the lowest to $14 . 12 for the highest, the average being $8 . 63 ; 
for all materials the average cost was $22 . 74 per ton of paper, with a 
range of from $15. 64 to $29. 22. The average cost of manufacturing 
labor is $3 . 27 per ton of paper, the range being from $2 . 19 to $7.26. 

Cost of Production of News-Print Paper in the United States, by 
Classified Rates of Cost per Ton 



Total Cost per Ton 



News-print paper: 

Under $25 

$25 and under $30. . . 
$30 and under $32 . 50 
$32 . 50 and under $35 
$35 and under $37. 50 
$37 . 50 and under $40 
$40 or over 

Total 



Number of 
Establish- 
ments 



I 

4 
7 
7 
6 
12 
I 



38 



Tons 
Produced 



4S,022 
170,319 
210,215 
205,992 

107,373 
194,604 

6,950 



940,478. 



Per Cent of 
Total Pro- 
duction 



4.8 
18. 1 
22.4 
21.9 
II. 4 
20.7 
■7 



100. 



Average 

Cost in 

Each Group 



24-50 
26.18 
31.96 
34-07 
36.03 

38.31 
43.00 



32. 



As will be seen from the classified table above, the plant producing 
at the lowest cost of $24.50 per ton produces but 4.8 per cent of 
the reported tonnage; only one plant produces at the highest rate 
and its production is but seven-tenths of i per cent of the reported 
tonnage. Four plants produce 18. i per cent, at an average total 
cost of $26.18. Seven plants produce 210,215.7 tons, or 22.4 per 
cent of the reported tonnage, at an average cost of $31.96; seven 
other plants produce 21.9 per cent of the total, at an average of 
$34.07 per ton; while 25 of the 38 establishments produce 78.6 per 
cent of the reported tonnage below $37.50; while 12 estabUshments 
produce 194,604 . 3 tons, or 20 . 7 per cent of the tonnage, at an average 
of $38.31 per ton. 

' Adapted from the Tariff Board Report on the Pidp and News-Print Paper 

Industry (191 1), p. 27. 



41 8 MATERIALS FOR ELEMENTARY ECONOMICS 

The lowest average manufacturing-labor cost in the classified 
group is $2 . 24, and 9 . 9 per cent of the reported tonnage is produced 
at this cost for manufacturing labor; 31.6 per cent is produced at an 
average of $2 .84 per ton. That is to say, 41 . 5 per cent of the total 
is produced at considerably less than the average of the whole, while 
an additional 24 per cent is produced at an average of $3 . 20, which is 
less than the average of the whole. An amount equal to 20.4 per 
cent of the total reported tonnage is produced at an average cost of 
manufacturing labor of $3.65 per ton; 11. i per cent at an average 
of $4.22 per ton. 

Taking the average of the manufacturing-labor cost for ground- 
wood pulp ($2.18) and for sulphite pulp ($3.84), and considering 
that paper uses 80 per cent of ground wood and 20 per cent of sulphite, 
the total manufacturing-labor cost from the rough wood to the 
finished paper would be $5 . 782 per ton; that is to say, 80 per cent of 
$2 . 18 is $1 . 744, 20 per cent of $3 . 84 is $0 . 768, and these added to the 
$3.27 labor cost in the paper itself gives a cost of manufacturing labor 
from rough wood to paper of $5 . 782 on the average. 

115. JOINT PRODUCT PRICES: BEEF^ 

The cost of beef is determined in part by the value of the by- 
products. The price of the live animal is reckoned to include the 
material for by-products as well as the beef, and the value of the 
by-products is regarded in the trade as a credit to the cost account 
of beef, or in other words, a minus cost. This is of course a rather 
arbitrary way of looking at the by-products account, because after 
all by-products are joint products, and the situation of the beef 
market (the prices of beef and the number of beef cattle slaughtered) 
determine in a considerable measure the prices of the by-products. 
The value of the latter, though small in comparison with the value of 
beef, is still important enough to considerably affect the total value. 
In the first half of 1903, for example, it is calculated for a large con- 
cern in Chicago that the average live weight was 1,165 pounds, the 
average dressed weight was 665 pounds, the average live price was 
$4.56, the average cost on dressed weight was $7.99, the average 
net value of hides was $6 . 64 ,the net value of hides per hundredweight 
of dressed beef was $1, the net value of butter fat was $3 . 95, the value 
per hundredweight of dressed beef was 59 cents, the net value of 

'From the Report of the Commissioner of Corporations on the Beef Industry 
(1905), p. 164. 



VALUE 419 

other by-products was $1.60, and the value of other by-products 
per hundredweight of dressed beef was 24 cents. The total value 
of by-products amounts to $12.19, or ^183 per hundredweight of 
dressed beef. The cost of killing, shipping, and selling was $1,891 
(excluding interest), which equals 28.4 cents per hundredweight. 
This should be deducted from the credit coming to the packer on 
the by-products in order to give the net credit he receives on the 
cost of cattle (reckoned on dressed weight). The difference, or net 
credit, is therefore $1.55 per hundredweight. These statistics show 
that with an average live price of $4 . 56 the cost per hundredweight 
of dressed beef would be $7. 99, and the cost of making and selling 
the beef 28.4 cents in addition, but that there is a credit on by- 
products amounting to $1.83. Hence the cost price of the beef 
(excluding interest on capital) would be $6.44, and the margin 
between live price of cattle and net cost of dressed beef $1 .88. 

116. DIRECT AND INDIRECT COSTS' 

The principle of apportioning the indirect costs according to 
ability to pay is not peculiar to the transportation business. It can 
be traced through numerous other industries. A very good analogy 
is that of the packing business. The original purpose of slaughtering 
houses was to supply meat. The margin between the price of cattle 
and the price of meat had to be sufficiently large to pay for the cost 
of killing and packing. These costs included two items, the cost 
of handling each particular animal plus a portion of the, "overhead." 
In the development of the industry it was found that refuse matter 
could be manufactured into fertilizer, which in the market would 
bring a price somewhat higher than the added cost resulting from its 
production. Even though each unit of fertilizer did not pay as much 
toward overhead charges as each unit of meat did, no injustice was 
done to the purchasers of meat. On the contrary, they might profit 
by the production of the fertilizer, because the total overhead expense 
to be distributed upon the several units of meat was reduced by 
the amount contributed by the fertilizer department, thereby enabling 
the packer to reduce the price of meat. Likewise, other by-products 
came to be manufactured and each of them bore a part of the indirect 
costs, decreasing the amount that the original product had to bear, 
and thereby aiding in its production. 

' From J. F. Strombeck, Freight Classification , pp. 21-24. Houghton Mifflin 
Co., 1912. 



420 MATERIAI>S FOR ELEMENTARY ECONOMICS 

What has been said about the packing business holds also in the case 
of the petroleum industry and many others. Whenever a by-product 
can be manufactured, it is an aid to the industry engaged in its pro- 
duction if it contributes even a little to the meeting of indirect costs. 

W. M. Acworth brings out an analogy between rail transportation 
and the production of electricity so convincing that it is well worth 
quoting in full. "The business of electric supply is usually a mo- 
nopoly, and in this country [i.e. England] it is more often than not 
in public hands, yet electric undertakings usually make charges more 
widely differential than an ordinary railway. A typical charge is 
^d per unit for electricity used for lighting purposes; id per unit for 
electricity used for power purposes. From the commercial stand- 
point the 5^ for lighting is fixed as the maximum which competition 
and other illuminants will permit; the iJ is a charge made to induce 
users of steam power, gas-engines and the like, to adopt electricity as 
a substitute. As a matter of equity the case is this: The electric 
undertaking was established primarily to supply light. It involves 
large capital cost for short-lived machinery and mains. Plant and 
staff must be capable of dealing with maximum demand, and this 
demand — 'the peak of the load,' as it is commonly called — only 
comes for about two hours of the day, and that during the winter 
months of the year. For about twenty hours out of the twenty-four, 
the bulk of the plant is idle; but interest, depreciation, and standing 
charges are running on all the time. Such service cannot but be 
expensive to give. There is, however, a way to make it less expensive. 
If consumers can be induced by the low price of i^ per unit to take 
electricity for power, they will use it in the daytime, to some extent 
even in the dead of night, when the machinery would otherwise be 
idle. The id — ex hypothese the highest rate the traffic will bear — 
will more than cover the extra cost of fuel, and will help to dilute the 
general expenses of the undertaking. So far from the low differential 
rate being an injury to, or made at the expense of the consumers of 
light, the contrary is the case. The standing charges — the great 
bulk of the whole — instead of being charged on, say, 1,000,000 units, 
are now spread over 6,000,000, and the cost of supply per unit is 
proportionally decreased. The increase of the low-charged power 
customers is the only means by which the lighting customers can hope 
to see the charges made to them reduced." 

And still another analogy might be offered. A manufacturer is 
selling his output in the domestic market at a fixed price, which nets 



VALUE 421 

him a fair return on his investment. The demands of the home 
market are not sufficient to enable him to run his factory at more 
than three-fourths its capacity. He finds that provided he reduces 
the price somewhat he can secure a foreign order which will enable 
him to operate his plant at its full capacity. This reduced price 
covers all the direct expenses connected with filling the order and 
leaves a small margin to be applied to'the indirect costs of his business. 
It is good policy for him to accept that order. This is exactly 
the same principle on which carriers give low rates to cheap 
commodities to encourage their movement. A low-value commodity 
which cannot bear the regular rate is to the carrier in exactly the same 
relation as the foreign order is to the manufacturer. And further, no 
one can say that the domestic purchaser pays a higher price on his 
goods so that the foreign order may be filled at a reduced price. The 
domestic purchaser does not only not bear part of the burden of the 
foreigner, but on the contrary he may be benefited by that sale in 
that the additional earnings will enable a reduction in the domestic 
price. 

117. DIMINISHING COST OF PRODUCTION' 

Edison told Mr. Edmonds a very interesting personal anecdote, 
especially pertinent at this time when the accusation is made that 
the United States is dumping large amounts of manufactured pro- 
ducts on the foreign market. Edison said: 

I was the first manufacturer in the United States to adopt the idea of 
dumping surplus goods upon the foreign market. Thirty years ago my 
balance sheet showed me that I was not making much money. My manu- 
facturing plant was not running to its full capacity. I couldn't find a 
market for my products. Then I suggested that we undertake to run our 
plant on full capacity and sell the surplus products in foreign markets at 
less than the cost of production. Every one of my associates opposed me. 
I had my experts figure out how much it would add to the cost of operating 
the plant if we increased this production 25 per cent. The figures showed 
that we could increase the production 25 per cent at an increased cost of 
only about 2 per cent. On this basis I sent a man to Europe who sold 
lamps there at a price less than the cost of production in Europe. By doing 
this I was able to employ more labor to run my plant to full capacity, and 
this labor, of course, received high wages. American consumers were not 
injured in the slightest, and I was enabled to employ 25 per cent more men 
and get rid of surplus product by dumping it upon the foreign market. 

' From the Wall Street Journal, December 20, 191 1. 



422 



MATERIALS FOR ELEMENTARY ECONOMICS 



ii8. DIAGRAM TO ILLUSTRATE DERIVED, JOINT AND COM- 
POSITE DEMAND, AND JOINT AND COMPOSITE SUPPLY 



G 



FfSH 



V^ 




AUTOMOBILES 



119. THE COMPLEXITY OF COMPETITIVE PRICE-MAKING' 

The following paragraphs present in the briefest possible form an 
analysis of competitive disturbances with an attempt to differentiate 
them systematically according to, first, the economic situation of the 
competing unit, and, second, the nature of the product about which 
competition centers. For brevity, the analysis is thrown into outline 
form. 

First. Competition insures a tendency to equal rewards as 
between competing units at a level not permanently below that of 
cost. Each competitor is concerned with the relation of his total 
receipts to his total outlay, and these tend to be equal. Each single, 
distinct economic process tends to produce value equal to its cost. 

Second. This requires that each unit of the product should 
bring in enough to pay the cost for which that unit, itself and indi- 
vidually, is responsible. Where joint cost is absent, it makes no 
difference whether one enterprise produces many things or whether 
the same things are produced each by a separate entrepreneur. 
Each separate economic process still tends to earn what it costs 
though many are combined under one management. 

Third. Where joint cost exists, the cost of an undertaking can 
no longer be subdivided in this simple way. The whole cost is no 

' From John Maurice Clark, Standards of Reasonableness in Local Freight 
Discriminations, pp. 40-45. Columbia University Studies in History, Economics, 
and Public Law, Vol. XXXVII, 1910. 



VALUE 423 

longer represented by the sum of the special costs. If items of 
product earn only their individual cost, the whole business is run at 
a loss, for the joint costs are not covered. While if the whole cost 
is covered, the outlays on joint account must be arbitrarily allotted. 
The latter alternative is what in the long run tends to happen. Hence 
competition does not control the ascribing of reward to various 
productive agents within the competing unit. 

a) A business carried on largely at joint cost is a business of 
increasing returns, within certain limits. If the plant has some 
capacity unused, it is easy to see that it is more wasteful than if there 
were no such unused capacity. And to get the greatest efficiency 
possible, a plant must be big enough to combine the productive factors 
in the best possible proportions. When this point is reached, the 
business ceases to be one of "increasing returns," and the resulting 
special motive to expansion ceases. But this does not straighten 
out the bookkeeping difficulties caused by the joint-cost feature. 

b) When businesses of increasing returns compete with each 
other, the practice arises of cutting rates to attract new custom while 
keeping up the general level of prices. This is discrimination between 
customers: "dumping" is a name that describes it rather well. If 
it is done by all the competitors at once it is an economic waste, 
and leads to "cut-throat" competition. This forces the total returns 
below the cost level. 

c) It is evident that such a condition occurs only when the 
capacity of the existing means of producing goods is greater than is 
justified by the demand. This cannot happen permanently, however; 
the low level of cost will increase the demand until finally we reach 
the limit of the capacity of the plants to expand with decreasing 
cost. At this point the violent underbidding for marginal custom 
begins to diminish, and the prices tend to rise as the demand expands 
still further. This rise in prices is, however, in most cases limited 
to something near a cost level by potential competition. A consider- 
able profit might, it is true, be retained; for men do not usually 
build big new plants unless those already in the business are earning 
extra good returns, so as to afford them a decided inducement to 
enter the field. But if the earnings of the plants in the business 
become very large, new plants will be built, for purposes of industrial 
blackmail if not for legitimate competition. 

d) While the condition of increasing returns lasts, and the ten- 
dency to cut-throat competition is strong, it is to the interest of all 



424 MATERIALS FOR ELEMENTARY ECONOMICS 

enterprises to prevent it in any way possible. Where the product 
in question is fairly homogeneous, as in the case of a flour mill or a 
woolen mill, the extension of the one-price principle forms a very 
good means of drawing the line between fair competition and that 
which "spoils the market." Under this principle, each unit of a 
homogeneous product is charged with the same share of joint-cost 
outlays. This equal prorating, however, does not stand as inherently 
logical in itself. It rests rather on the business necessity for some 
such limitation. 

e) Where the product, instead of being homogeneous, is very 
heterogeneous, any such simple limitation as has just been described 
is bound to fail. In such cases, if the condition of increasing returns 
lasts any length of time, direct, active competition becomes distinctly 
uneconomical and the chances are very great that it will be done 
away with entirely. Potential competition will then be the only 
governor of prices. This to a considerable extent is true of business 
conditions today. In the case of railroads potential competition is 
not very efficient, but other forces, generalized under the caption of 
"market competition" are claimed to have the same effect. 

/) But it is only direct competition that can regulate the prices 
of all the single articles in a composite product. Even when the 
capacity of a producer is fully utilized so that further production 
would not fall under the law of increasing returns, still the fact of 
producing at joint cost would, within limits, allow considerable 
discretion as to the manner of sharing the existing general costs. 
Potential competition and market competition in its more general 
form, if not in all cases, leave such discretion in the hands of the 
"competitor"; that is, these forms of competition fail as regulators 
of prices in detail. 

We have now in effect made a simple classification of the funda- 
mental phenomena of joint-cost competition, which can be presented 
in tabular form. 

Can we pigeonhole the railroad in the following scheme satisfac- 
torily? It certainly falls in the two divisions that deal with joint 
cost and increasing returns. But to argue about the railroad, and 
to deal with it merely as a large manufacturing business producing a 
very heterogeneous product under conditions of joint cost and of 
increasing returns unusually long-continued — such a conception, 
while allowing for many of the peculiarities of railway economics, 
is still inadequate. There are still further departures from type 



VALUE 



425 



Competing Unit 


Product Homogeneous 


Products Heterogeneous 


Producer in whose process 
joint cost is negligible. 


Each unit earns its own 
cost. 


Each unit earns its own 
cost. 


Producer under the law of 
joint cost and increasing 
returns. 


Temptation to cut-throat 
competition easily re- 
strained by the senti- 
ment of producers and 
the one-price principle. 


Active competition runs 
almost inevitably into 
cut-throat competition, 
bringing general price- 
level below cost. This 
competition tends to 
destroy itself. 


Producer under the law of 
joint cost, but working 
near maximum efKiciency 
so that increasing returns 
are no longer important. 


Temptation to cut-throat 
competition removed. 
Joint costs naturally 
assigned pro rata, as 
in the case above. 


General price-level tends 
to equal that of cost. 
Joint-cost items im- 
puted to units of pro- 
duct at discretion of 
entrepreneur. 


All the producers in the 
district served by a single 
railroad system. 




General level of railroads' 
charges tends to be 
lower •than monopoly 
price. Discriminations 
between different ship- 
pers not removed. Be- 
yond this, data insuffi- 
cient for simple generali- 
zation. 



for which allowance must be made, and which have yet to be thor- 
oughly thrashed out in the field of economic discussion and contro- 
versy. By this is meant the "competition of markets" principle 
as applied to railways, a principle which is certainly different in its 
workings from typical competition, not only in degree, but in kind. 
This term is applied to the competition of two or more roads for the 
privilege of carrying to a common market goods produced on their 
respective lines, a kind of competition in which the railroad and the 
producer co-operate. 

We have here the last and greatest extension in competing units 
which we must add to our scheme of variations from the competitive 
type. For the competition which governs railway rates is now the 
competition in ultimately marketing the goods which the railroad 
carries. In this the roads themselves are not directly involved, and 
those who are directly involved are legion. 



426 MATERIALS FOR ELEM-ENTARY ECONOMICS 

120. SELLING BELOW COST: TOBACCO' 

The Imperial Tobacco Company immediately began a campaign 
of active competition to check and frustrate the plans of the American 
Tobacco Company for strengthening its foothold in Great Britain. 
In March, 1902, the Imperial offered large bonuses to customers who 
would undertake not to sell American goods for a term of years. The 
American Tobacco Company, through the Ogden's Company, met 
this by offering to its British customers, for the next four years, its 
whole net profits on British business, and £200,000 a year besides. 
The offer was as follows : 

Commencing April 2, 1902, we will for the next four years distribute 
to such of our customers in the United Kingdom as purchase direct from us 
our entire net profits on the goods sold by us in the United Kingdom. In 
addition to the above, we will, commencing April 2, 1902, for the next four 
years, distribute to such of our customers in the United Kingdom as purchase 
direct from us the sum of £200,000 per year. The distribution of net profits 
will be made as soon after April 2, 1903, and annually thereafter, as the 
accounts can be audited, and will be in proportion to the purchases made 
during the year. The distribution as to the £200,000 per year will be made 
every three months, the first distribution to take place as soon after July 2, 
1902, as accounts can be audited, and will be in proportion to the purchases 
during the three-months period. To participate in this offer we do not 
ask you to boycott the goods of any other manufacturer. 

This offer had a marked effect in opening the British trade to 
American competition. As a countermove the Imperial Tobacco 
Company threatened to invade the American market, and in the sum- 
mer of 1902 it was reported to be selecting sites for factories in this 
country. Before any definite steps were taken, however, to carry out 
this plan, an agreement was arrived at between the two great rival 
corporations which completely changed their position toward each 
other. 

121. PRICE POLICIES OF THE DISTRIBUTER^ 

The producer who today enters the market to manufacture and 
sell a commodity in competition with other producers of substantially 
identical products has open to him three general price policies. He 

' From the Report oj the Commissioner of Corporations on the Tobacco Industry, 
Part I (1909), p. 169. 

^Adapted from A. W. Shaw, "Some Problems in Market Distribution," 
Quarterly Journal of Economics, XXVI, 712-17 (August, 1912). 



VALUE 427 

may adopt one of these to the exclusion of the others, or may use them 
in combination. 

These three policies may be termed, (i) selling at the market 
minus; (2) selling at the market; and (3) selling at the market plus. 

1 . Selling at the market minus is that policy which aims to increase 
sales by reducing price. The distributer who markets his product at 
a price range below that established for the identical commodity as 
sold by other producers not only attracts consumers from other dis- 
tributers, but also brings into the market as consumers certain of those 
whose demand was before unexpressed because the price level estab- 
lished for the commodity was above that warranted by their subjective 
valuation on the commodity. 

This policy does not ordinarily involve a differentiation of the 
product from the stock product of like nature, nor the use of trade 
marks, brands, or trade names. The producer depends upon increased 
sales to give a reduced proportion of overhead expense and reduced 
costs of large scale production, thus increasing his area of profit. The 
producer appeals to the consumer mainly through the difference in 
price level. 

This policy finds illustration in the selling policy of most depart- 
ment stores. It is the basis of bargain counter selling. In one class 
of department store it becomes the dominant policy. Some such 
stores base their business almost entirely on selling under the market, 
advertising the purchase of bankrupt stocks and mill clearances as 
making possible such price cutting. 

And in nearly all department stores the manager will at times 
reduce the price upon a staple commodity below that at which his 
competitors are willing to sell. His increased sales, arising from 
custom drawn from his competitors and from new consumers brought 
into the market, decrease the proportion of overhead expense and 
enable him to purchase in larger quantities. His larger purchases put 
him in a position to force the producer to share with him the economies 
of large scale production. Often, indeed, he is able to take over the 
entire output of certain factories. 

In the department store, moreover, the further element enters that 
customers attracted to purchase a staple commodity at less than the 
prevailing price will also purchase other commodities yielding a wider 
margin of profit. 

2. Selling at the market has been the policy perhaps most charac- 
teristic of our scheme of distribution during the period when the stress 



428 MATERIALS FOR ELEMENTARY ECONOMICS 

was on production. It is still a common policy in the marketing of 
staple goods. 

This policy consists briefly in the acceptance of the market price 
existing for the commodity as a fixed condition. The producer does 
not seek to attract purchasers by maintaining a price level somewhat 
lower than that at which other producers of the same commodity are 
willing to sell, nor does he attempt to establish his commodity upon a 
new and higher price level as a distinct commodity. He recognizes 
the market price for such a commodity as something objective, and 
sells his commodity at the established level. 

The acceptance of this price policy leaves open to the merchant- 
producer two general methods of increasing his area of profit. He may 
devote himself to a reduction in his cost of production by a better 
organization of his plant, or he may seek to increase his sales, thus 
giving economies of large scale production and a reduced proportion 
of overhead expenses. 

Examples of the adoption of this policy and the use of the first 
method of increasing profits are found in the steel industry. The 
small independent manufacturer often accepts the market price of a 
given steel product as a fixed condition, sells his " share " of the market, 
and depends upon reducing his plant costs to increase his profits. 

If the merchant-producer adopts this second method, he must, in 
general, differentiate his product from that of his competitors and 
build up a demand for his particular product. To do this he must 
depend upon the same means that would be used to establish his 
product as a distinct commodity upon a higher price level. Trade 
marks, brands, and trade names, coupled with niceties of finish, even- 
ness in the quality, or more convenient packages, serve as the basis for 
an increased demand for the commodity upon the same price level as 
substantially identical products. When selling at the market, 
superior promptness in delivery may become a factor of great impor- 
tance in increasing sales. 

A recent development in the textile industry illustrates the 
adoption of the policy of selling at the market, combined with an 
attempt to increase sales at the market price by a differentiation of 
the product. Apparently the textile manufacturers who are begin- 
ning to brand their goods do not seek to establish a new price level for 
their product as a distinct commodity, but rather to increase their sales 
by building up a demand for their commodity as against the product 
of other manufacturers at the prevailing price level. 



VALUE 429 

3. Selling at the market plus is perhaps the most characteristic price 
policy of modern distribution. The exceptionally able distributers 
have in recent years turned more and more to this policy. They 
refuse to accept as a fixed condition the market price for the com- 
modities similar to those which they produce. They isolate their 
product, and establish it, practically as a new commodity, on a differ- 
ent price level. 

The whole basis of the policy is the differentiation of a product 
from other goods of substantially like nature by improvements, minor 
or substantial, and the identification of the product by trade marks, 
brands, and trade names. This done, the producer stimulates a 
demand for his product by calling attention to stability of quality, 
niceties of finish, improvements in package, or like modifications. He 
appeals to that portion of the consuming public whose subjective 
valuation upon the stock commodity has left them a so-called 
"consumer's surplus" over the market price. The differentiated 
commodity is established on a new and higher price level, and is, to 
all intents and purposes, a new commodity. 

It is this policy that forms the most severe test of the ability of the 
distributer. To succeed he must have an unusual equipment, includ- 
ing knowledge of human nature, of the psychological organization of 
the individual consumer, and must be able to give proper weight to 
such motives as social emulation and all the varied factors that enter 
into the subjective ratio of exchange of the consumer. 

122. MONOPOLY PRICE: COFFEE VALORIZATION^ 

Coffee-drinking began to increase apace, especially in the United 
States. By 1890, the wholesale price of coffee was more than 17 cents 
a pound, and still only a little more than half the world's supply 
came from Brazil. For the next six years her planters enjoyed an 
intoxicating prosperity. During that period nearly all the three 
million inhabitants of the state of Sao Paulo "entirely gave up plant- 
ing corn, rice, beans, everytliing they needed. They bought them, 
because coffee was so immensely profitable that they put all their 
labor in coffee." 

It takes from three to five years for a new coffee tree to come into 
bearing, but by 1897 Sao Paulo's sudden rush into the field began to 

' From Robert Sloss, "Why Coffee Costs Twice as Much," The World's Work, 
XXIV, 198-205 (June, 1912). 



43© MATERIALS FOR ELEMENTARY ECONOMICS 

tell. That year the wholesale price of coffee was only a trifle above 
7 cents a pound. It declined year by year, till between 1901 and 
1903 it hung around 5 cents a pound. Hard times for the planters 
set in. The Sao Paulo government declared a tax on any new coffee 
plantations, hoping to drive the inhabitants back to raising corn and 
rice and beans, but it was a vain hope. They mortgaged their 
plantations and went right on raising larger coffee crops than all the 
rest of the world put together. Hard times grew harder. Mortgages 
began to be foreclosed right and left. Plantations were falling into 
foreign hands. The Sao Paulo planters were in ugly mood, and they 
demanded that the state government restore prosperity. There was 
grave danger of a revolution. In the face of it the government 
promised that it would itself buy up a large proportion of the next 
coffee crop at a price above the market. The only thing lacking 
was the ready cash. So the government appointed a special com- 
missioner to find it. 

He went first to Paris, to the Rothschilds, who had been the 
bankers of Brazil for sixty years. He was "flatly and at once re- 
fused." So was he by all the other bankers of Europe. Then the 
Commissioner bethought him of the coffee merchants. Who of them 
all could understand conditions in Brazil so well as Hermann Sielcken ? 
— and he was conveniently resting at his place near Baden Baden. 
Thither the Commissioner repaired in August, 1906, and explained 
the situation. 

"Well, what do you want us to do ? " asked Hermann Sielcken. 

" We want you to finance for us five to eight million bags of coffee," 
said the Commissioner, blandly. 

Here was an adventure. Here was a proposition to lift bodily 
out of the market half as much coffee as the world's total production 
had averaged for the ten preceding years when prices had been so 
low. Presumably, if this were done, prices would be doubled. But 
Hermann Sielcken shook his head. 

"No," he said, "there is not the slightest chance for it, not the 
slightest." And he pointed out that there would be "no financial 
assistance coming from any where" if the Sao Paulo planters kept on 
raising such ridiculously large crops of coffee. 

The Commissioner assured him that the prospect was for smaller 
crops in future. Hermann Sielcken was not so sure about it. 

"At a price low enough — ," he mused. "I might be able to raise 
funds to pay 80 per cent on a value of 7 cents a pound." 



VALUE 431 

The Commissioner was dismayed. His government had already 
promised to take coffee from the planters at about a cent a pound 
above the market, and the market then stood at nearly 8 cents. The 
government would have to dig to make up the difference. Hermann 
Sielcken's terms were the best that could be got, however, and the 
Commissioner accepted them. 

Thus was launched the famous "Valorization Coffee Plan." 
From that time forth Hermann Sielcken's part in it became "a. very 
active one." He approached a few large coffee merchants. Arbuckle 
Bros., his former business rivals, were the first to join him in this new 
kind of speculation. Two or three other firms followed. "We are 
going to finance it downward," Hermann Sielcken told them. He 
explained that if the Brazilians knew they could get enough money 
to buy six or eight million bags of coffee there would be no holding 
them, and that the merchants would simply be lending money to 
have the market put up suddenly on themselves. 

So Hermann Sielcken drew up a contract. In it the merchants 
agreed to advance 80 per cent of the sum required to buy two million 
bags of coffee at 7 cents a pound. If the market went above 7 cents 
the government was to make no purchases. If it fell below 7 cents the 
government was to make good the difference to the merchants by 
cable. The government further agreed not to buy in any event more 
than 500,000 bags of coffee per month from October i, 1906, to 
February i, 1907, the principal crop season. 

Before that season was well advanced the unexpected was happen- 
ing. The Brazilians were harvesting the biggest coffee crop in the 
world's history. The market quickly dropped below 7 cents and 
went on falling. By the end of January, 1907, the Sao Paulo govern- 
ment had purchased the 2,000,000 bags of coffee. But that was only 
a drop in the bucket, and the government was clamoring for more 
money with which to stem the tide. 

Hermann Sielcken and the merchants with him saw the wisdom 
of that. If the tide were not stemmed, it would spread abroad in 
the world so much coffee that the two miUion bags, the security of the 
merchants, would be worthless. Hermann Sielcken became very 
active, and "all over France and Germany and Belgium brought in 
every one who could help carry the load." And in little more than a 
year since he had told the Commissioner at Baden Baden that there 
was "not the slightest chance for it," Hermann Sielcken, with the aid 
of some forty merchants, had financed for Sao Paulo the purchase of 
8,357,500 bags of coffee. 



432 MATERIALS FOR ELEMENTARY ECONOMICS 

But Sao Paulo wasn't satisfied. During this first year of "Valori- 
zation," the Brazilian coffee crop had run to almost 20 million bags. 
Those planters who had been able to sell to the government had 
received about a cent a pound above the market, but they had been 
obliged to pay half of that back in the form of an export tax on coffee 
to enable the government to carry its loans. Toward the end of 
1907, although Sao Paulo had lifted half the world's visible supply of 
coffee, the market stood only a trifle above 6 cents a pound. That 
was not at all the Brazilian planter's idea of prosperity. 

Things grew no better during 1908. Although the next coffee crop 
turned out much smaller, the world's supply was still so far in excess 
of the demand that the market remained down. The Sao Paulo 
planters continued grumblingly to pay the export tax, but that all 
went as interest to the merchants. The government of Sao Paulo 
had spent not only the merchants' money but also all its own funds 
on valorization, and was rapidly going bankrupt. In desperation 
it sold, sub rosa, 1,300,000 bags of the coffee that was the merchants' 
security. 

The merchants began to have misgivings. There was not the 
slightest prospect of Sao Paulo's being able to pay off their loans. If it 
came to throwing the purchased coffee on the low market, their securi- 
ties would go for a mere song. Where was the profitable speculation 
into which Hermann Sielcken had led them ? They made it plain that 
they didn't want to help carry the loan any longer. There were signs 
of mutiny aboard the good ship "Valorization" in 1908. 

It was a year of especial activity for Hermann Sielcken. He went 
straight to the Rothschilds and proved to them what a profitable 
speculation it would be if only they and a few big bankers would take 
the places of the merchants in the Valorization Coffee Plan. He 
pointed out that there still remained more than 7 million bags of 
coffee as security after the surreptitious sales of the Sao Paulo govern- 
ment. Valued at 6| cents a pound, the market price at that time, it 
would more than pay off the loans which stood against it. None of 
the merchants had advanced more then five and six-tenths cents a 
pound on it, most of them much less; on a great deal of it only 4 cents 
a pound had been advanced. Of course, the coffee would not bring 
6^ cents if thrown on the market now. But if it could be held, it 
could be gradually and profitably disposed of during a period of, say, 
ten years — especially if something could really be done meanwhile to 
help the price of coffee. 



VALUE 433 

The Rothschilds had some suggestions; they knew Brazil. They 
repUed that such a loan could not be considered unless the coffee 
as security for it be shipped from Brazil and placed in the hands of 
bankers for safekeeping and subsequent disposal. 

That would involve carrying charges, costs of management, etc. 
Then there would be nearly $4,000,000 in interest to pay the first 
year. The present export tax on coffee in Sao Paulo, less than one- 
half a cent a pound, was too low. Sao Paulo must about double it. 

But, Hermann Sielcken pointed out, taxes are just what the 
planters were objecting to down there. 

Then, the Rothschilds felt, they must be taught how to get rid 
of taxes. They are growing at present 85 per cent of the world's 
coffee. If, instead of constantly offering more coffee than was 
wanted, they saw to it that the world got somewhat less than it 
needed, other nations would pay all the taxes on coffee. The federal 
government of Brazil should interest itself in this matter. It collected 
a tax on coffee, called the pouta, 9 per cent of the market price in 
Brazilian ports. By doing something to help the price of coffee, 
Brazil would relieve her citizens of that burden and increase her 
own revenues at the same time. Let her pass a national law imposing 
a heavy penalty on anyone that planted a new coffee tree in Brazil, and 
let it be made effective by the appointment of federal inspectors to 
go strictly about the country and tear up any new trees. The result 
would take a little time, of course. But meanwhile Sao Paulo could 
do something at once to help the price of coffee. The state govern- 
ment could guarantee that not more than 9 million bags of her next 
coffee crop should be exported, nor more than 10 million of any 
succeeding crop. 

Mr. Sielcken thought that these conditions would be agreed to, 
because the government was in such a bad way down in Brazil that 
they would do almost anything. 

Well, then, if Sao Paulo would issue bonds, and if the federal 
government of Brazil would guarantee them, the Rothschilds would 
take a portion, provided other bankers would take the rest. 

Hermann Sielcken hurried around to other bankers. In December, 
1908, everything was settled. The Sao Paulo government got $75,- 
000,000, promptly paid off the original loans of the merchants, and had 
a tidy little sum left to go on with. 

So the coffee merchants were eliminated from valorization — all but 
Hermann Sielcken. When the six bankers closed the deal, they each 



434 MATERIALS FOR ELEMENTARY ECONOMICS 

appointed a representative, who, with one from the Sao Paulo govern- 
ment, comprised a committee charged with the future management of 
the affair. On this committee the only American was Hermann 
Sielcken, representing the American underwriters of the loan, a minor 
interest of but $10,000,000. 

Thus completely refitted, "Valorization" put to sea again to 
sail in shoal waters no more. And Hermann Sielcken's part in it 
remained a very active function on the Bankers' Committee. The 
future of valorization depended upon being able to dispose favorably 
of the valorization coffee. Such of it as might be allotted to America 
was to be disposed of under the sole management of Hermann Sielcken. 
America drinks more than half of the world's coffee. The price of a 
commodity is fixed by the world's best market for it, and the price 
of coffee in Havre, Hamburg, London, and even in Brazil follows 
closely the price on the New York Exchange. To offer any consider- 
able quantity of coffee on that exchange would naturally cause the 
market to break all over the world, and that would be bad for valoriza- 
tion. Hermann Sielcken's task was a delicate one. 

No sooner had the Bankers' Committee taken hold of valorization 
than the price of coffee on the New York Exchange began to go up. 
It was 6^ cents all through December, 1908, when the deal was closed. 
By the middle of January, 1909, it had jumped to 7 cents; by the end 
of February it was 8 cents — although a larger crop than the preceding 
year was being harvested down in Brazil. Sao Paulo was worried 
about restricting exports, and proposed instead that she should make 
assurance sure by collecting a tenth of her coffee crop every year 
and dumping it into the sea. This the Bankers' Committee solemnly 
approved. A similar intention on the part of the Dutch long ago had 
been branded by Adam Smith in his Wealth of Nations as "a savage 
policy." The press of the world so branded this, and it was abandoned. 
Nevertheless, the price of coffee on the New York Coffee Exchange 
ruled higher for 1909 and the Bankers' Committee offered for sale 
500,000 bags of valorization coffee, half of which was sold by Hermann 
Sielcken in New York. 

The year 1910 opened in the midst of a season when a still larger 
coffee crop was being harvested in Brazil, and yet the market on the 
New York Coffee Exchange stood at 8| cents. Again the annual 
sale of the Bankers' Committee was announced, 600,000 bags, half of 
which were disposed of in New York by Hermann Sielcken. Then 



VALUE 435 

in the middle of May he sailed for Europe and repaired to his country 
estate at Baden Baden. 

He was no more than comfortably settled there than the price of 
coffee on the New York Coffee Exchange began to jump up, till on 
the last day of 1910 it stood at 13^ cents. It had stood at 6| cents in 
December, 1908, when the bankers agreed to come into valorization. 
Here was a rise of more than 100 per cent in two years — a rise of 60 
per cent in six months. 

During those six months, Hermann Sielcken, though at his 
country seat in Germany, was active. Early in 191 1, when the 
coffee market stood well above 13 cents, Hermann Sielcken made a 
flying trip to attend the meeting of the Bankers' Committee in 
Paris. There it was decided that they would sell double the usual 
quantity of coffee that year, 1,200,000 bags. Word came by cable 
that 600,000 bags had been sold by Hermann Sielcken in New York. 
We have his own word for it that those sales of 191 1 cleaned up 
$25,000,000, "or one-third of the loan from less than one-sixth of the 
coffee." 

The good ship "Valorization" will make port in 191 2. She 
was chartered in 1908 for a cruise of ten years. She has accomplished 
it in little more than three. In that time she has picked up not only 
all of the $75,000,000 advanced by the bankers, but about $10,000,000 
or more necessary to retire the Sao Paulo bonds at par; also another 
odd $10,000,000 to pay interest on the bonds; also all carrying 
charges on the purchased coffee and all salaries and expenses of man- 
agement by the Bankers' Committee. In this brief adventure 
valorization has quietly gathered from the American breakfast 
table half the export tax on coffee, imposed in Brazil to make possible 
a loan the purpose of which was to put up the price of coffee on the 
world. From the same American breakfast table valorization has 
gathered half the pouta, the federal tax on coffee in Brazil, from which 
the government buys battleships and pays for campaigns in tea- 
drinking countries — especially England — to increase the use of coffee, 
while in Brazil everything is being done to decrease production and 
exports. 

To the Brazilian planter, valorization brings, at present market 
prices, a profit of nearly 200 per cent on his coffee crop, over and above 
all costs of production, taxes, exchange, and transportation from the 
interior of Brazil to the coffee ports of the world. 



436 MATERIALS FOR ELEMENTARY ECONOMICS 

Above all, "Valorization" has now, safely stowed away between 
decks, 4,400,000 bags of coffee, which, if the present market is main- 
tained, and the stock is carefully sold away from the exchanges, is 
worth, to be exact, 14^ cents a pound.' 

123. DISCRIMINATING PRICES: OIL^ 

The prices charged by the Standard Oil Company for petroleum 
products in the United States differ widely in different places according 
to the degree of competition or monopoly. This is true of all classes 
of petroleum products, but is most conspicuous and most easily demon- 
strated with respect to illuminating oil and gasoline. After deducting 
freight rates, which often constitute a large element in gross prices, 
extraordinary differences in prices appear (i) as among different states 
or sections of the country and (2) as among towns in the same general 
vicinity — for example, within the borders of a single state. These 
differences in price are to some extent due to differences in the cost of 
producing the oil and gasoline sold in different sections and in part to 
differences in the cost of marketing. In many cases, however, they 
are due solely to differences in the degree of competition, and in other 
cases a large part of the difference in price is due to difference in the 
degree of competition. 

CONDITIONS MAKING PRICE DISCRIMINATION POSSIBLE 

The methods of marketing oil products lend themselves to this 
practice of price discrimination. Illuminating oil and gasoline — and 
the same is in less measure true of other petroleum products — are not 
to any large extent sold at central markets or through jobbing con- 
cerns independent of the refiner. The Standard Oil Company sells 
most of its illuminating oil and gasoline in the United States directly 
to retail dealers at their own towns. They are largely delivered to 
retail dealers at their own stores by means of tank wagons. Conse- 

' [In 191 2 the United States government started a suit against those in this 
country who had entered into the cofEee valorization plan on the ground that they 
were operating contrary to law. The suit threatened to involve the government 
in complications with Brazil, and eventually a compromise was agreed upon 
whereby the suit was to be withdrawn provided the coffee held in this country 
under the valorization plan was sold. In the spring of 1913 the government having 
been assured that the coffee had been sold withdrew the suit. Since that time the 
price of coffee has fallen to about 9 cents a pound (August, 1913).] — Editors. 

= From the Report of the Commissioner oj Corporations on the Petroleum Industry, 
Part II (1907), pp. 27-36. 



VALUE 437 

quently the prices of oil and gasoline are in general purely local prices. 
The retail dealer is ordinarily not familiar with prices charged in other 
towns or in central markets, but even if he were he could not take 
advantage of lower prices prevailing elsewhere to buy oil there and 
bring it into his own town. The cost of transporting oil in barrels, 
particularly in less than carload lots, is higher than in tank cars. 
Moreover, tank-wagon delivery is so much more convenient than 
barrel delivery that the retail dealer is ordinarily unwilling to buy 
barrel oil even at a lower price. 

The Standard Oil Company has established the system of tank- 
wagon delivery in the larger towns in all parts of the United States 
and in a large proportion of the smaller towns in the more populous 
sections. The business of its competitors is largely confined to a 
limited area and to a limited number of towns within that area. In 
towns and sections where there is no competition the Standard can 
charge monopoly prices, and by reason of the high prices thus obtained 
it can afford to reduce prices in competitive areas and towns to a 
point which leaves no profit for the independent concern. 

Perhaps the most striking instance of sectional discrimination 
which has appeared during recent years is on the Pacific coast. In 
southern California there are a number of independent refineries. 
The Standard carries oil from its great refinery near San Francisco, 
several hundred miles by water and rail, and sells it in southern 
California for much less than the price at San Francisco. The 
average price, freight deducted, for the southern part of California 
in December, 1904, was 7.2 cents per gallon, while for the northern 
part of the state it averaged 12.4 cents per gallon. In Oregon, 
supplied from the same source, the price averaged 15.3 cents per 
gallon, and in Washington, 15.7 cents. The price in Washington 
and Oregon was thus more than twice as high as in Southern California 
for the same oil. 

These differences in price among the several states and parts of 
states within the territory supplied from a single source much exceed 
the possible differences in marketing cost. 

Evidence that differences in price are due to discrimination and 
not merely to differences in cost is found in the records of the Waters 
Pierce Oil Company, which show both the prices in individual towns 
and the margin of profit above delivered cost. For example, in the 
East Texas and Louisiana division of the Waters Pierce Company, in 
August, 1903, the margin between cost and selling price on Brilliant 



438 MATERIALS FOR ELEMENTARY ECONOMICS 

oil from tank wagon ranged from i . 92 cents to 5.59 cents. In 
August, 1904, the margin of profit ranged from 0.69 cents to 5.05 
cents. The price charged by the Waters Pierce Oil Company for 
prime-white oil in iron barrels in Belleville, 111., in April, 1904, was 
so low, on account of active competition, as to cause a loss to the 
company of o. i cent per gallon, while in numerous other towns in 
the same division of the company's territory (Missouri division) 
there was a margin of profit of from 4 to 5 cents per gallon. 

124. THE BURDEN OF ADVERTISING COSTS' 

I. THE ACTUAL OUTLAY 

An editorial in Printer's Ink for May 4, 191 1, p. 78, gives the 
following estimate of advertising outlay in the United States through 
some of the chief mediums in general use: 

Newspaper advertising (retail and general) $250,000,000 

Direct mail advertising (circulars, form letters, etc.) 100,000,000 

Magazine advertising 60,000,000 

Farm and mail order 75,000,000 

Novelty 30,000,000 

Billposting 30,000,000 

Outdoor — electric signs, etc 25,000,000 

Demonstration and sampling 18,000,000 

Street car advertising 10,000,000 

House, organs, etc 7,000,000 

Distributing 6,000,000 

Theater programmes, curtain and miscellaneous 5,000,000 

$616,000,000 

II. THE INCIDENCE OF THE COST 

The question, "Who pays for advertising ? " is often discussed and 
seldom with any profit. The fruitlessness of these discussions is more 
often due to lack of a clear statement of the problem than to any other 
single cause. Before any such discussion has gone far it often becomes 
clear that neither the term "pays" nor the term "advertising" repre- 
sents identical ideas in the minds of the disputants. 

It is generally agreed that the direct outlay for advertising in the 
United States runs far over $600,000,000 a year, and there is a very 

' From P. T. Cherington, Advertising as a Business Force, pp. 69, 429-34. 
Doubleday, Page & Co., 191 3. (Copyrighted by the Associated Advertising 
Clubs of America.) 



VALUE 439 

strong temptation to undertake to say categorically that that amount 
comes directly out of the pockets of some one element of the dis- 
tribution system. We have been told many times that this bill is , 
paid by the consumer. Somewhat less frequently, but with equal 
emphasis, it has been declared that the competitor who does not 
advertise foots the advertising bill of the man who does. And these 
are only two of many explanations. 

It will not be the purpose of this chapter to undertake to close 
this interesting question. The most that will be undertaken will be 
a suggestion as to what ought to be clearly understood by "paying" 
and by "advertising" before any attempt to answer the question is 
made. 

Let us take the hypothetical case of a hardware manufacturer 
with a going plant and an established distribution, having among his 
products a patented stove-cover lifter retailing at 25 cents. This 
specialty never has been specially advertised, and it has been handled 
as a side line, sold in connection with other products of the concern. 
The output is 100,000 a year. The price to the retailer is 15 cents, 
and to the wholesaler 10 cents, and the actual cost of production 
based on an output of 100,000 is 7 cents each. The elements of pro- 
duction and distribution cost could then be represented roughly by 
Fig. A [p. 440]. 

Now suppose the manufacturer, who has been figuring on a net 
profit of 3 cents on each Hfter, decides to spend two-thirds of this 
profit in advertising this lifter. Until that advertising produces some 
kind of a tangible result we can represent it as coming entirely out 
of the manufacturer's profits (Fig. B). 

But suppose this outlay has been so judicious as to double the 
original demand and raise the output to 200,000 lifters instead of 
100,000. By doubling his output the manufacturer can produce each 
lifter at a reduced cost. If we call this new cost 5 cents, instead of 
the original 7 cents, we see that the net profit on each lifter after pay- 
ing for the advertising is restored to 3 cents (Fig. C) as it was before 
the advertising. But with the same net profit on each lifter and a 
doubled output the manufacturer's total profit is doubled. 

At the same time the doubled business due to the advertising 
has produced similar effects in the distributing system. The whole- 
saler's expense of doing business on each Hfter on a basis of 100,000 
produced was 2 cents. But if the volume of the business be doubled 
(supposing the increase to be distributed proportionately among the 



440 



MATERIALS FOR ELEMENTARY ECONOMICS 



wholesalers) each wholesaler handling the lifter will find some reduc- 
tion in his cost of doing business on each lifter sold. His saving 
will not be as large as that of the manufacturer, but his expense will 
be reduced. And the same is true of the retailer (Fig. D). 



Price to Consumer 25 
Price to Retailer 15 
Price to Wholesaler 10 



B 



D 



P.C. 
3 


B. 
1 


s. 

2 


G. 
1 


P. 

3 


2 


P.' 
3 


E.' 
6 


P." 
4 


Figure A — Before advertising. 










A. 

2 


P. 
1 






Figure B — Advertising cost taken from manufacturer's profit. 


P.C. 

2i 


B 


S. 


G 

4 


A. 

2 


P. 

3 






Figure C — Increased production lowers production costs absorbing adver- 
tising cost. 




E.' 


P.' 

Si 


E." 

4^ 


P." 

5^ 



Figure D — Increased production lowers distribution costs. 
Price to Consumer 18 
Price to Retailer \\\ 
Price to Wholesaler Sh 



E 



PC. 

2i 


B 

3 
4 


s. 


G 

3 
4 


A. 

2 


P. 


E.' 


P.' 


E." 


P." 
2 



Figure E — Effect of lowered price on costa and profits. 



VALUE 



441 





Output 


100,000 


Output 200,000 




Fig. A 


Fig. B 


Fig. C 


Fig. D 


Fig. E 


Manufacturer — 

P.C. Prime cost 


3 
I 
2 
I 


3 

I 
2 

I 
2 

I 


2i 

3 

4 

li 
3 
1 

2 

3 


2i 
3 

3 

2 
3 


2^ 


B. Burden 

S. Special selling 


3 
4 

Iz 


G. General 


3 


A. Advertising 




P. Profit 


3 


li 


Price to wholesaler 


10 

10 
3 


10 

10 

2 
3 


10 
10 


10 

10 
i^ 

3l 


Sk 


Wholesaler — ■ 

Cost . . . . 


8^ 


E' Expense of doing business. . . . 
P' Profit 








Price to retailer 


15 

IS 
6 

4 


15 

6 
4 




15 

si 


Il5 


Retailer — 

Cost 


iiA 


E" Expense of doing business .... 
P" Profit 


4l 
2 


Price to consumer 


25 


25 




25 


18 



Each of these cases, so far, presupposes that all prices are to be 
maintained — lo cents to the wholesaler, 15 cents to the retailer, and 
25 cents to the consumer. So long as the prices are maintained and 
demand is not weakened each handler of the goods makes more total 
profit when the output is increased. Some of this increase is due to 
decreased selling expense per lifter, and some to the greater volume of 
sales. In the case of the wholesalers we see that the actual profit 
margin has increased from 3 to 3I cents on each lifter, and, with the 
number of sales doubled it appears that the wholesaler is making 7 
cents out of this lifter trade where he formerly made 3 cents. By the 
same process the retailer's total profit has increased from 4 cents to 
two times 5I cents, or 1 1 cents. 

Thus the manufacturer is making as much as he did, before adver- 
tising, on each lifter, and twice as much on the entire business. And 
the wholesaler and retailer are each making more on each article and 
are selling twice as many. The consumer, on the other hand, is 
paying no more than he did before. Now the question is, who is 
"paying" for the advertising in this case? 

And now suppose that, through one cause or another, the prices 
are reduced (Fig. E) to 18 cents to the consumer, 11^ cents to the 



442 MATERIALS FOR ELEMENTARY ECONOMICS 

retailer and 8| cents to the wholesaler. The output now being at 
200,000 with corresponding costs, the price reduction leaves to each 
of these handlers of the goods, and to the manufacturer, only one half 
of the profits they originally made on each piece. But each is selling 
twice as many as he did originally and hence is making total profits 
which are exactly the same as those they were making before the 
advertising. The consumer, however, is now paying 7 cents less for 
lifters than he did originally. The question as to who "pays" now 
takes on an entirely different aspect. 

We now see that the problem of "paying" for the advertising has 
to do, not only with the actual outlay for advertising, but also with the 
relation between that outlay and the reduction in manufacturing and 
distribution costs coming from the increased demand which that 
outlay produces. 

And this case takes no account of the potential future reductions 
of the same kind which may follow from new demand which has been 
aroused by the advertising but which is not yet converted into sales. 
Nor has any account been taken of the effect of this stimulation of 
demand for one single manufacturer's output upon the trade of his 
competitors. And these are only two out of many other factors which 
have been left out of this case for the sake of making this one point 
clear. ^ No one can say who has paid for any piece of advertising 
outlay until he knows what has been its effect on demand — and 
consequently on production and distribution costs and on production 
and distribution profits. 

' Throughout this case we have given attention only to advertising by the 
producer. It will make profitable exercise work to develop similar diagrams 
showing the effects of advertising by wholesalers and retailers. 



X. MONEY AND PRICES 

125. EXCHANGE BY BARTER' 

f Some years since, Mademoiselle Zelie, a singer of the Theatre 
Lyrique at Paris, made a professional tour round the world, and gave 
a concert in the Society Islands. In exchange for an air from Norma 
and a few other songs, she was to receive a third part of the receipts. 
When counted, her share was found to consist of three pigs, twenty- 
three turkeys, forty-four chickens, five thousand cocoa-nuts, besides 
considerable quantities of bananas, lemons, and oranges. At the 
Halle in Paris, as the prima donna remarks in her lively letter, printed 
by M. Wolowski, this amount of live stock and vegetables might have 
brought four thousand francs, which would have been good remunera- 
tion for five songs. In the Society Islands, however, pieces of money 
were very scarce; and as Mademoiselle could not consume any con- 
siderable portion of the receipts herself, it became necessary in the 
mean time to feed the pigs and poultry with the fruit./' 

When Mr. Wallace was traveling in the Malay Archipelago, he 
seems to have suffered rather from the scarcity than the super- 
abundance of provisions. In his most interesting account of his 
travels, he tells us that in some of the islands, where there was no 
proper currency, he could not procure supplies for dinner without a 
special bargain and much chaffering upon each occasion. If the 
vendor of fish or other coveted eatables did not meet with the sort 
of exchange desired, he would pass on, and Mr. Wallace and his 
party had to go without their dinner. It therefore became very 
desirable to keep on hand a supply of articles, such as knives, pieces 
of cloth, arrack, or sago cakes, to multiply the chance that one or 
other article would suit the itinerant merchant. 

The first difficulty in barter is to find two persons whose disposable 
possessions mutually suit each other's wants. There may be many 
people wanting, and many possessed of those things wanted; but to 
allow of an act of barter, there must be a double coincidence, which 
will rarely happen. A hunter having returned from a successful chase 
has plenty of game, and may want arms and ammunition to renew the 
chase. But those who have arms may happen to be well supplied 

' From W. S. Jevons, Money and the Mechanism of Exchange, chap. i. 

443 



444 MATERIALS FOR ELEMENTARY ECONOMICS 

with game, so that no direct exchange is possible. In civilized society 
the owner of a house may find it unsuitable, and may have his eye 
upon another house exactly fitted to his needs. But even if the owner 
of this second house wishes to part with it at all, it is exceedingly 
unlikely that he will exactly reciprocate the feelings of the first owner, 
and wish to barter houses. Sellers and purchasers can only be made 
to fit by the use of some commodity, some merchandise banale, as the 
French call it, which all are willing to receive for a time, so that what 
is obtained by sale in one case, may be used in purchase in another. 
This common commodity is called a medium of exchange, because it 
forms a third or intermediate term in all acts of commerce. 

A second difficulty arises in barter. At what rate is any exchange 
to be made? If a certain quantity of beef be given for a certain 
quantity of corn, and in like manner corn be exchanged for cheese, and 
cheese for eggs, and eggs for flax, and so on, still the question will arise 
— How much beef for how much flax, or how much of any one com- 
modity for a given quantity of another ? In a state of barter the price- 
current list would be a most complicated document, for each com- 
modity would have to be quoted in terms of every other commodity, 
or else complicated rule-of-three sums would become necessary. 
Between one hundred articles there must exist no less than 4,950 
possible ratios of exchange, and all these ratios must be carefully 
adjusted so as to be consistent with each other, else the acute trader 
will be able to profit by buying from some and selling to others. 

All such trouble is avoided if any one commodity be chosen, and 
its ratio of exchange with each other commodity be quoted. Knowing 
how much corn is to be bought for a pound of silver, and also how 
much flax for the same quantity of silver, we learn without further 
trouble how much corn exchanges for so much flax. The chosen 
commodity becomes a common denominator or common measure of 
value, in terms of which we estimate the values of all other goods, so 
that their values become capable of the most easy comparison. 

A third, but it may be a minor, inconvenience of barter arises from 
the impossibility of dividing many kinds of goods. A store of corn, a 
bag of gold dust, a carcase of meat, may be portioned out, and more or 
less may be given in exchange for what is wanted. But the tailor, as 
we are reminded in several treatises on political economy, may have a 
coat ready to exchange, but it much exceeds in value the bread which 
he wishes to get from the baker, or the meat from the butcher. He 
cannot cut the coat up without destroying the value of his handiwork. 



MONEY AND PRICES 445 

It is obvious that he needs some medium of exchange, into which he 
can temporarily convert the coat, so that he may give a part of its 
value for bread, and other parts for meat, fuel, and daily necessaries, 
retaining perhaps a portion for future use. Further illustration is 
needless; for it is obvious that we need a means of dividing and 
distributing value according to our varying requirements. 

126. THE EARLY HISTORY OF MONEY' 

Living in civilized communities, and accustomed to the use of 
coined metallic money, we learn to identify money with gold and 
silver; hence spring hurtful and insidious fallacies. It is always 
useful, therefore, to be reminded of the truth, so well stated by Turgot, 
that every kind of merchandise has the two properties of measuring 
value and transferring value. It is entirely a question of degree 
what commodities will in any given state of society form the most 
convenient currency, and this truth will be best impressed upon us by 
a 1)rief consideration of the very numerous things which have at one 
time or other been employed as money. Though there are many 
numismatists and many political economists, the natural history of 
money is almost a virgin subject, upon which I should like to dilate; 
but the narrow limits of my space forbid me from attempting more 
than a brief sketch of the many interesting facts which may be 
collected. 

CURRENCY IN THE HUNTING STATE 

Perhaps the most rudimentary state of industry is that in which 
subsistence is gained by hunting wild animals. The proceeds of the 
chase would, in such a state, be the property of most generally recog- 
nized value. The meat of the animals captured would, indeed, be 
too perishable in nature to be hoarded or often exchanged; but it 
is otherwise with the skins, which, being preserved and valued for 
clothing, became one of the earhest materials of currency. Accord- 
ingly, there is abundant evidence that furs or skins were employed 
as money in many ancient nations. They serve this purpose to the 
present day in some parts of the world. 

In the Book of Job (2:4) we read, "Skin for skin, yea, all that a 
man hath will he give for his life"; a statement clearly implying that 
skins were taken as the representative of value among the ancient 
oriental nations. Etymological research shows that the same may be 

' From W. S. Jevons, Money and the Mechanism of Exchange, chap. iv. 



446 MATERIALS FOR ELEMENTARY ECONOMICS 

said of the northern nations from the earliest times. In the Esthonian 
language the word rdha generally signifies money, but its equivalent 
in the kindred Lappish tongue has not yet altogether lost the 
original meaning of skin or fur. Leather money is said to have 
circulated in Russia as late as the reign of Peter the Great, and it is 
worthy of notice that classical writers have recorded traditions to the 
effect that the earliest currency used at Rome, Lacedasmon, and 
Carthage was formed of leather. 

We need not go back, however, to such early times to study the 
use of rude currencies. In the traffic of the Hudson's Bay Company 
with the North American Indians, furs, in spite of their differences of 
quality and size, long formed the medium of exchange. It is very 
instructive, and corroborative of the previous evidence to find that, 
even after the use of coin had become common among the Indians, the 
skin was still commonly used as the money of account. Thus Whymper 
says, "a gun, nominally worth about forty shillings, bought twenty 
'skins.' This term is the old one employed by the company. One 
skin (beaver) is supposed to be worth two shillings, and it repre- 
sents two marten, and so on. You heard a great deal about 'skins' at 
Fort Yukon, as the workmen were also charged for clothing, etc, in 
this way." 

CURRENCY IN THE PASTORAL STATE 

In the next higher stage of civilization, the pastoral state, sheep 
and cattle naturally form the most valuable and negotiable kind of 
property. They are easily transferable, convey themselves about, 
and can be kept for many years, so that they readily perform some of 
the functions of money. 

We have abundance of evidence, traditional, written, and etymo- 
logical, to show this. In the Homeric poems oxen are distinctly and 
repeatedly mentioned as the commodity in terms of which other 
objects are valued. The arms of Diomed are stated to be worth nine 
oxen, and are compared with those of Glaucos, worth one hundred. 
The tripod, the first prize for wrestlers in the 23d Iliad, was valued at 
twelve oxen, and a woman captive, skilled in industry, at four. It is 
peculiarly interesting to find oxen thus used as the common measure 
of value, because from other passages it is probable, as already men- 
tioned, that the precious metals, though as yet uncoined, were used 
as a store of value, and occasionally as a medium of exchange. The 
several functions of money were thus clearly performed by different 
commodities at this early period. 



MONEY AND PRICES 447 

In several languages the name for money is identical with that of 
some kind of cattle or domesticated animal. It is generally allowed 
that pecunia, the Latin word for money, is derived from pecus, cattle. 
From the Agamemnon of ^schylus we learn that the figure of an ox 
was the sign first impressed upon coins, and the same is said to have 
been the case with the earliest issues of the Roman As. Numismatic 
researches fail to bear out these traditions, which were probably 
invented to explain the connection between the name of the coin and 
the animal. A corresponding connection between these notions may 
be detected in much more modern languages. Our common expres- 
sion for the payment of a sum of money is fee, which is nothing but 
the Anglo-Saxon /go/f, meaning alike money and cattle, a word cognate 
with the German vieh, which still bears only the original meaning of 
cattle. As I am informed by my friend Professor Theodores, the 
same connection of ideas is manifested in the Greek word for property, 
KT^fia, which means alike possession, flock, or cattle, and is referred 
by Grimm to an original verb kcVw or Kerao), to feed cattle. It is 
even supposed by Grimm that the same root reappears in the Teutonic 
and Scandinavian languages, in the Gothic skatts, the modern High- 
German schatz, the Anglo-Saxon scat, or sceat, the ancient Norsk skat, 
all meaning wealth, property, treasure, tax, or tribute, especially in 
the shape of cattle. This theory is confirmed by the fact that the 
Frisian equivalent, sket, has retained the original meaning of cattle 
to the present day. In the Norsk, Anglo-Saxon, and English, scat or 
scot has been specialized to denote tax or tribute. 

In the ancient German codes of laws, fines and penalties are actually 
defined in terms of live-stock. In the Zend Avesta, as Professor 
Theodores further informs me, the scale of rewards to be paid to 
physicians is carefully stated, and in every case the fee consists in 
some sort of cattle. The fifth and sixth lectures in Sir H. S. Maine's 
most interesting work on "The Early History of Institutions," are 
full of curious information showing the importance of live-stock in a 
primitive state of society. Being counted by the head, the kine was 
called capitale, whence the economical term capital, the law term 
chattel, and our common name cattle. 

In countries where slaves form one of the most common and 
valuable possessions, it is quite natural that they should serve as the 
medium of exchange like cattle. Pausanias mentions their use in this 
way, and in Central Africa and some other places where slavery still 
flourishes, they are the medium of exchange along with cattle and 



448 MATERIALS FOR ELEMENTARY ECONOMICS 

ivory tusks. According to Earl's account of New Guinea, there is 
in that island a large traffic in slaves, and a slave forms the unit of 
value. Even in England slaves are believed to have been exchanged 
at one time in the manner of money. 

ARTICLES OF ORNAMENT AS CURRENCY 

A passion for personal adornment is one of the most primitive 
and powerful instincts of the human race, and as articles used for 
such purposes would be durable, universally esteemed and easily trans- 
ferable, it is natural that they should be circulated as money. The 
wampumpeag of the North American Indians is a case in point, as it 
certainly served as jewelry. It consisted of beads made of the ends 
of black and white shells, rubbed down and polished, and then strung 
into belts or necklaces, which were valued according to their length, 
and also according to their color and luster, a foot of black peag 
being worth two feet of white peag. It was so well established as 
currency among the natives that the Court of Massachusetts ordered 
in 1649 that it should be received in the payment of debts among 
settlers to the amount of forty shillings. It is curious to learn, too, 
that just as European misers hoard up gold and silver coins, the richer 
Indian chiefs secreted piles of wampum beads, having no better means 
of investing their superfluous wealth. 

Exactly analogous to this North American currency is that of the 
cowry shells, which, under one name or another — chamgos, zimbis, 
bouges, porcelanes, etc. — have long been used in the East Indies as 
small money. In British India, Siam, the West Coast of Africa, and 
elsewhere on the tropical coasts, they are still used as small change, 
being collected on the shores of the Maldive and Laccadive Islands, 
and exported for the purpose. Their value varies somewhat, accord- 
ing to the abundance of the yield, but in India the current rate used 
to be about 5,000 shells for one rupee, at which rate each shell is worth 
about the two-hundredth part of a penny. Among our interesting 
fellow-subjects, the Fijians, whale's teeth served in the place of 
cowries, and white teeth were exchanged for red teeth somewhat in 
the ratio of shillings to sovereigns. 

Among other articles of ornament or of special value used as cur- 
rency may be mentioned yellow amber, engraved stones, such as the 
Egyptian scarabaei, and tusks of ivory. 



MONEY AND PRICES 449 

• CURRENCY IN THE AGRICULTURAL STATE 

Many vegetable productions are at least as well suited for circula- 
tion as some of the articles which have been mentioned. It is not 
surprising to find, then, that among a people supporting themselves 
by agriculture, the more durable products were thus used. Corn has 
been the medium of exchange in remote parts of Europe from the time 
of the ancient Greeks to the present day. In Norway corn is even 
deposited in banks, and lent and borrowed. What wheat, barley, 
and oats are to Europe, such is maize in parts of Central America, 
especially Mexico, where it formerly circulated. In many of the 
countries surrounding the Mediterranean, olive oil is one of the com- 
monest articles of produce and consumption; being, moreover, pretty 
uniform in quality, durable, and easily divisible, it has long served as 
currency in the Ionian Islands, Mytilene, some towns of Asia Minor, 
and elsewhere in the Levant. 

Just as cowries circulate in the East Indies, so cacao nuts, in Cen- 
tral America and Yucatan, form a perfectly recognized and probably 
an ancient fractional money. Travelers have published many distinct 
statements as to their value, but it is impossible to reconcile these 
statements without supposing great changes of value either in the 
nuts or in the coins with which they are compared. In 1521, at 
Caracas, about thirty cacao nuts were worth one penny English, 
whereas recently ten beans would go to a penny, according to Squier's 
statements. In the European countries, where almonds are com- 
monly grown, they have circulated to some extent like the cacao nuts, 
but are variable in value, according to the success of the harvest. 

It is not only, however, as a minor currency that vegetable pro- 
ducts have been used in modem times. In the American settlements 
and the West India Islands, in former days, specie used to become 
inconveniently scarce, and the legislators fell back upon the device of 
obliging creditors to receive payment in produce at stated rates. In 
161 8, the Governor of the Plantations of Virginia ordered that tobacco 
should be received at the rate of three shillings for the pound weight, 
under the penalty of three years' hard labor. We are told that, when 
the Virginia Company imported young women as wives for the settlers, 
the price per head was one hundred pounds of tobacco, subsequently 
raised to one hundred and fifty. As late as 1732, the legislature of 
Maryland made tobacco and Indian corn legal tenders; and in 1641 
there were similar laws concerning corn in Massachusetts. The 
governments of some of the West India Islands seem to have made 



4 so MATERIALS FOR ELEME^JTARY ECONOMICS 

attempts to imitate these peculiar currency laws, and it was pro- 
vided that the successful plaintiff in a lawsuit should be obliged to 
accept various kinds of raw produce, such as sugar, rum, molasses, 

ginger, indigo, or tobacco 

The perishable nature of most kinds of animal food prevents them 
from being much used as money; but eggs are said to have circulated 
in the Alpine villages of Switzerland, and dried codfish have certainly 
acted as currency in the colony of Newfoundland. 

MANUFACTURED AND MISCELLANEOUS ARTICLES AS CURRENCY 

The enumeration of articles which have served as money may 
already seem long enough for the purposes in view. I will, therefore, 
only add briefly that a great number of manufactured commodities 
have been used as a medium of exchange in various times and places. 
Such are the pieces of cotton cloth, called Guinea pieces, used for trafl&c 
upon the banks of the Senegal, or the somewhat similar pieces circu- 
lated in Abyssinia, the Soulou Archipelago, Sumatra, Mexico, Peru, 
Siberia, and among the Veddahs. It is less easy to understand the 
origin of the curious straw money which circulated until 1694 in the 
Portuguese possessions in Angola, and which consisted of small mats 
called libongos, woven out of rice straw, and worth about i^d. each. 
These mats must have had, at least originally, some purpose apart 
from their use as currency, and were perhaps analogous to the fine 
woven mats so much valued by the Samoans, and also treated by 
them as a medium of exchange. 

Salt has been circulated not only in Abyssinia, but in Sumatra, 
Mexico, and elsewhere. Cubes of benzoin gum or beeswax in Sumatra, 
red feathers in the Islands of the Pacific Ocean, cubes of tea in Tartary, 
iron shovels or hoes among the Malagasy are other peculiar forms of 
currency. The remarks of Adam Smith concerning the use of hand- 
made nails as money in some Scotch villages will be remembered by 
many readers, and need not be repeated. M. Chevalier has adduced 
an exactly corresponding case from one of the French coalfields. 

Were space available it would be interesting to discuss the not 
improbable suggestion of Boucher de Perthes, that, perhaps, after all, 
the finely worked stone implements now so frequently discovered were 
among the earliest mediums of exchange. Some of them are cer- 
tainly made of jade, nephrite, or other hard stones, only found in 
distant countries, so that an active traffic in such implements must 
have existed in times of which we have no records whatever. 



MONEY AND PRICES 451 

There are some obscure allusions in classical authors to a wooden 
money circulating among the Byzantines, and to a wooden talent 
used at Antioch and Alexandria, but in the absence of fuller informa- 
tion as to their nature, it is impossible to do more than mention them. 

127. A MONETARY CHRONOLOGY' 

1786. — Establishment of the double standard in the United States 
with a ratio of i to 15.25; that is, on the basis of 123.134 grains of 
fine gold for the half eagle, or $5 piece, and 375.64 grains of fine 
silver for the dollar, without any actual coinage. 

1792. — Adoption of the ratio of i to 15 and establishment of a 
mint with free and gratuitous coinage in the United States; the silver 
dollar equal to 3715 grains fine, the eagle to 247^ grains fine. 

1792-1812. — The First Bank of the United States. It rendered 
good service as the fiscal agent of the government and as a check upon 
issues by state banks. This latter service was performed by present- 
ing state bank notes for redemption. 

1805. — Ceased coining the silver dollar. By the operation of 
Gresham's law the most of those already coined had gone to the West 
Indies. The coinage of the silver dollar was renewed in 1836. 

1812-16. — Period of rapid expansion of state banks. 

1816-36. — ^The Second Bank of the United States. This bank 
rendered service similar to the First. 

18 J4. — Substitution of the ratio of i to 16 for that of i to 15 in the 
United States by reducing the weight of the eagle, ten-dollar gold 
piece, from 270 grains to 258 grains. 

In 1837 the fineness of the United States gold coins was raised from 
.899,225 to .900, and the silver coins from .8924 to .900, giving a 
ratio of I to 15 . 988, and fixing the standard weight of the silver dollar 
at 412^ grains. 

1847. — Discovery of the gold mines of California. 

18^1. — Discovery of the gold mines of Australia. 

18 j J. — ^Lowering of the weight of silver pieces of less value than $1, 
to the extent of 7 per cent in the United States, and Umitation of their 
legal-tender power to $5. 

18 j J. — Maximum of the production of gold reached in CaUfornia, 
when it amounted to $65,000,000. 

1861. — The United States Government issued ''demand notes." 

■ Adapted from Circular No. 52, United States Treasury Department (191 2), 
pp. 41-45. 



452 MATERIALS FOR ELEMENTARY ECONOMICS 

1862. — The United States Government began to issue the "Legal 
Tender" or "greenbacks." 

i862-'/Q. — ^The period of suspension of specie payments. 

1863. — National bank act passed. 

1866. — ^An act to provide for the gradual retiring of the green- 
backs. This act was suspended by the act of 1868. 

i^/j. — Panic. In response to popular demand 26,000,000 of 
the canceled greenbacks were re-issued. 

1^7 J. — Increase of the intrinsic value of the subsidiary coins of the 
United States. Replacing of the double standard by the gold stand- 
ard. Reduction of the cost of coinage of gold to one-fifth per cent, 
the total abolition of which charge was decreed in 1875. Creation of 
a trade dollar of 420 grains with a fineness of . 900. 

iSy^. — ^Act providing for resumption of specie payments, January 
I, 1879, was passed. This act provided for the reduction of the green- 
backs to $300,000,000. The act of 1878 stopped this reduction. 
The amount then, as now, outstanding was $346,681,016. 

i8'/8. — Act of United States Congress providing for the purchase, 
from time to time, of silver bullion, at the market price thereof, of 
not less than $2,000,000 worth per month as a minimum, nor more 
than $4,000,000 worth per month as a maximum, and its coinage as 
fast as purchased into silver dollars of 41 2 1 grains. The coinage of 
silver on private account prohibited. 

1879. — Resumption of specie payments. 

i8go. — United States — Repeal of the act of February 28, 1878, 
commonly known as Bland-Allison law, and substitution of authority 
for purchase of 4,500,000 fine ounces of silver each month, to be paid 
for by issue of Treasury Notes ("the Treasury Notes of 1890") 
payable in coin. 

j^pj. — Panic. The " endless chain "of redemption of United States 
notes at the Treasury. Repeal of the purchasing clause of the act 
of 1890. 

1900. — ^The gold standard formally adopted in the United States. 

1908. — An act providing for emergency note issue by national banks. 

138. HISTORY OF COINS AND CURRENCY OF THE 

UNITED STATES' 

In 1786 the Congress of the Confederation chose as the monetary 

unit of the United States the dollar of 375.64 grains of pure silver. 

This unit had its origin in the Spanish piaster or milled dollar, which 

' From Circular No. 52, United States Treasury Department (191 2), pp. 25-27. 



MONEY AND PRICES 453 

constituted the basis of the metallic circulation of the EngHsh colonies 
in America. It was never coined, there being at that time no mint in 
the United States. 

The act of April 2, 1792, established the first monetary system of 
the United States. The bases of the system were: The gold dollar or 
unit, containing 24.75 grains of pure gold, and stamped in pieces of 
$10, $5, and $2|, denominated, respectively, eagles, half eagles, and 
quarter eagles; the silver dollar or unit, containing 371.25 grains of 
pure silver. A mint was established. The coinage was unlimited, 
and there was no mint charge. The ratio of gold to silver in coinage 
was I to 15. Both gold and silver were legal tender. The standard 
was double. 

The act of 1792 undervalued gold, which was therefore exported. 
The act of June 28, 1834, was passed to remedy this, by changing the 
mint ratio between the metals to i to 16.002. This latter act fixed 
the weight of the gold dollar at 25.8 grains, but lowered the fineness 
from o. 9i6f to o. 899225. The fine weight of the gold dollar was thus 
reduced to 23 . 2 grains. The act of 1834 undervalued silver, as that 
of 1792 had undervalued gold, and silver was attracted to Europe by the 
more favorable ratio of i to 15I. The act of January 18, 1837, was 
passed to make the fineness of the gold and silver coins uniform. 
The legal weight of the gold dollar was fixed at 25.8 grains and its 
fine weight at 23.22 grains. The fineness was therefore changed by 
this act to 0.900 and the ratio to i to 15. 988+. 

Silver continued to be exported. The act of February 21, 1853, 
reduced the weight of the silver coins of a denomination less than $1, 
which the acts of 1792 and 1837 had made exactly proportional to the 
weight of the silver dollar, and provided that they should be legal 
tender to the amount of only $5. Under the acts of 1792 and 1837 
they had been full legal tender. By the act of 1853 the legal weight 
of the half dollar was reduced to 192 grains and that of the other 
fractions of a dollar in proportion. The coinage of the fractional 
parts of the dollar was reserved to the Government. 

The act of February 12, 1873, provided that the unit of value of the 
United States should be the gold dollar of the standard weight of 25 . 8 
grains, and that there should be coined, besides, the following gold 
coins: A quarter eagle, or 2 ^-dollar piece; a 3-dollar piece; a half 
eagle, or 5-dollar piece; an eagle, or lo-doUar piece, and a double 
eagle, or 20-dollar piece, all of a standard weight proportional to that 
of the dollar piece. These coins were made legal tender in all pay- 
ments at their nominal value when not below the standard weight and 



454 MATERIALS FOR ELEMENTARY ECONOMICS 

limit of tolerance provided in the act for the single piece, and when 
reduced in weight they should be legal tender at a valuation in propor- 
tion to their actual weight. The silver coins provided for by the act 
were a trade dollar; a half dollar, or 50-cent piece; a quarter dollar; 
and a lo-cent piece; the weight of the trade dollar to be 420 grains 
troy; the half dollar, i2| grams; the quarter dollar and the dime, 
respectively, one-half and one-fifth of the weight of the half dollar. 
These silver coins were made legal tender at their nominal value for 
any amount not exceeding $5 in any one payment. The charge for 
converting standard gold bullion into coin was fixed at one-fifth of 
I per cent. Owners of silver bullion were allowed to deposit it at 
any mint of the United States, to be formed into bars or into trade 
dollars, and no deposit of silver for other coinage was to be received. 

Section 2 of the joint resolution of July 22, 1876, recited that the 
trade dollar should not thereafter be legal tender, and that the Secre- 
tary of the Treasury should be authorized to limit the coinage of the 
same to an amount sufl&cient to meet the export demand for it. The 
act of February 19, 1887, retired the trade dollar and prohibited its 
coinage; that of September 26, 1890, discontinued the coinage of the 
i-doUar and 3-dollar gold pieces. 

The act of February 28, 1878, directed the coinage of silver dollars 
of the weight of 41 2 1 grains troy, of standard silver, as provided in 
the act of January 18, 1837, and that such coins, with all standard 
silver dollars theretofore coined, should be legal tender at their nomi- 
nal value for all debts and dues, public and private, except where 
otherwise expressly stipulated in the contract. 

The Secretary of the Treasury was authorized and directed by the 
first section of the act to purchase from time to time silver bullion at 
the market price thereof, not less than $2,000,000 worth nor more 
than $4,000,000 worth per month, and to cause the same to be coined 
monthly, as fast as purchased, into such dollars. A subsequent act, 
that of July 14, 1890, enacted that the Secretary of the Treasury 
should purchase silver bullion to the aggregate amount of 4,500,000 
ounces, or so much thereof as might be offered, each month, at the 
market price thereof, not exceeding $1 for 371 . 25 grains of pure silver, 
and to issue in payment thereof Treasury notes of the United States, 
such notes to be redeemable by the Government, on demand, in coin, 
and to be legal tender in payment of all debts, public and private, 
except where otherwise expressly stipulated in the contract. The act 
directed the Secretary of the Treasury to coin each month 2,000,000 



MONEY AND PRICES 455 

ounces of the silver bullion purchased under the provisions of the act 
inio standard silver dollars until the ist day of July, 1891, and there- 
after as much as might be necessary to provide for the redemption of 
the Treasury notes issued under the act. The purchasing clause of 
the act of July 14, 1890, was repealed by the act of November i, 1893. 

The act of June 9, 1879, made the subsidiary silver coins of the 
United States legal tender to the amount of $10. The minor coins 
are legal tender to the amount of 25 cents. 

The act of March 14, 1900, declares that the dollar, consisting of 
25.8 grains of gold .900 fine "shall be the standard unit of value," 
and makes it the duty of the Secretary of the Treasury to maintain 
at a parity of value with this standard all forms of money issued or 
coined by the United States. 

129. REDEMPTION OF UNITED STATES MONEY' 

Gold coins and standard silver dollars, being standard coins of the 
United States, are not "redeemable." 

Subsidiary coins and minor coins may be presented, in sums or 
multiples of $20, to the Treasurer of the United States or to an 
assistant treasurer for redemption or exchange into lawful money. 

United States notes are redeemable in United States gold coin in 
any amount by the Treasurer and all the assistant treasurers of the 
United States. 

Treasury notes of i8go are redeemable in United States gold coin 
in any amount by the Treasurer and all the assistant treasurers of the 
United States. 

National-bank notes are redeemable in lawful money of the United 
States by the Treasurer, but not by the assistant treasurers. They 
are also redeemable at the bank of issue. In order to provide for the 
redemption of its notes when presented, every national bank is 
required by law to keep on deposit with the Treasurer a sum equal to 
5 per cent of its circulation. 

Gold certificates, being receipts for gold coin, are redeemable in such 
coin by the Treasurer and all assistant treasurers of the United States. 

Silver certificates are receipts for standard silver dollars deposited, 
and are redeemable in such dollars only. 

"Coin" obligations of the government are redeemed in gold coin 
when gold is demanded and in silver when silver is demanded. 

' From Circular No. 52, United States Treasury Department (191 2), pp. 40-41. 



4S6 MATERIALS FOR ELEMENTARY ECONOMICS 

130. LEGAL-TENDER QUALITIES OF UNITED STATES MONEY' 

There are ten different kinds of money in circulation in the United 
States, namely, gold coins, standard silver dollars, subsidiary silver, 
gold certificates, silver certificates. Treasury notes issued under the 
act of July 14, 1890, United States notes (also called greenbacks and 
legal tenders), national-bank notes, and nickel and bronze coins. 
These forms of money are all available as circulation. While they do 
not all possess the full legal-tender quality, each kind has such attri- 
butes as to give it currency. The status of each kind is as follows: 

Gold coin is legal tender at its nominal or face value for all debts, 
public and private, when not below the standard weight and limit of 
tolerance prescribed by law; and when below such standard and 
limit of tolerance it is legal tender in proportion to its weight. 

Standard silver dollars are legal tender at their nominal or face 
value in payment of all debts, public and private, without regard to 
the amount, except where otherwise expressly stipulated in the contract. 

Subsidiary silver is legal tender for amounts not exceeding $10 in 
any one payment. 

Treasury notes of the act of July 14, i8go, are legal tender for all 
debts, public and private, except where otherwise expressly stipu- 
lated in the contract. 

United States notes are legal tender for all debts, public and private, 
except duties on imports and interest on the public debt.' 

Gold certificates, silver certificates, and national-bank notes are not 
legal tender, but both classes of certificates are receivable for all 
public dues, while national-bank notes are receivable for all public 
dues except duties on imports, and may be paid out by the Govern- 
ment for all salaries and other debts and demands owing by the 
United States to individuals, corporations, and associations within 
the United States, except interest on the public debt and in redemp- 
tion of the national currency. All national banks are required by 
law to receive the notes of other national banks at par. 

The minor coins of nickel and copper are legal tender to the 
extent of 25 cents. 

Foreign coins are not legal tender. — Section 3584 of the Revised 
Statutes of the United States provides that no foreign coins shall be 
a legal tender in the United States. 

'From Circular iVo.j2, United States Treasury Department (i9i2),pp. 28-29. 

= United States notes, upon resumption of specie payments, January i, 1879, 
became acceptable in payment of duties on imports and have been freely received 
on that account since the above date, but the law has not been changed. 



MONEY AND PRICES 



457 





£> 


O 


1- 





M 




M 




oc 


M 


1 






looo ts vo O 




M 


c 


^ IN 




00 


00 C< t^ too 




>o 




5 t~; 




. 


cs~ c> 0~ ro c-T 




oo" 


c 


1^ vo' 




M 


O 00 O M 00 




00 




■> o 




>, 


<N^ H^ t-; t q; 




M 




■) M 




l-l 














\0 ^^ lo t^ 




O 


r 


h -O 




;3 


O fN vO 




M 




M 




a 


€^ 




rc 


c 


■> 00 










++ 




€^ 




CO •* vO O 00 


XT} PO 


~S 


(• ro 






O^00 IN ro lO 


Ch <N 


c 


M 






MM t^ ts r^ 









5 vq^ 


















O' 


vo <s o c^ M 


6s M 


<: 


vcT 


o 


M 


■"to ro rt ro 




CN 


c 


^ 00 


•. 


rtO fO O " 


qs o 


















5 




r^ (N O O M 


Ol 


r^ 




■) O 


>» 


O ■^ i-~0 rj- 




ro 





r^ 


hJ 


"3 


O O ■* M 




ro 


r> 


M 




1—, 


«© 








I^ 


^ 












4^ 


U 
















oo O M oi o 




O 


M 


r^ 


2 




On •rt vO O O 


oc 


O 




O 


f^ 


lO t^ rO M O 


r^ t^ 


C 


^ O 
















>< 


o> 


O M O O "^ 


sC 


<0 




o" 


H 




t^ ro r^oo O 


lO c^ 


^ 


M 


Z 


„ 


O lo O iH t^ 


m: 


O 




rO 


o 














S 


_>. 


00 oo <N o •* 


0. 


t^ 


VC 


M 


O O t^ r^ lo 




ro 




t^ 




"5 


vO O •* w 




rO 


r- 


^ 




1— I 


©^ m" 








fO 




Ov •"*• fO O 00 




c^ 


"^ 


o 






<N o 00 r>. m 


sC 


vO 


oc 


M 




to 


^ ro 00 O) t^ 


rc O 




■) r^ 


















c 


■•t t^ lO M o 


OC 


in 




^ O 






O 00 OOO N 


t-~ rn 


t- 


t^ 






0^ "JO o, "2 ''I 


sC 


00^ 


m: 


fO 


















ttj 


O trZ cT rC T? 




oo" 


T 


F tC 




c 


M c^ t^\o »o 




ro 




lo 




3 


vo o -"i- H 




ro 


t~ 


ro 




l-> 


^ 








^ 


(<4 




<^ O OOO M 


o o 




■) lO 


o 


fO 


0> <N vn o w 




M 


OC 


O 


w 


M 


O^ •"t ><5„00, "^ 




fO 


c 


fv q_ 


H 


O 














^ tF m" o~ >>^ 


c'i r^ 




^ fO 


- 


00 o o^o o 




vo 


c 


h 1/1 


U5 * 


t-l 


q^ w^ O; ro r-. 




r^ 


oc 


q^ 


>, 












r^Ooo' S <^ O 




00 


Cs 


tC 


23 H 


"a 


r^ t^ M <N 






T 


(• Tf 


< a 


*-> 


M 








rO 






m^ 








^ 














<: o 




t^ir> t^ o 00 


O t~- 





rO 


go 


^^ 


O t^ rO to lO 


ro Tf- 


OC 


VO 


»-t 


cs r^ M r^ M 


>£: 


<^ 


T 


M 


2 H 


o> 














oo a> r^ lo 0\ 


<> lO 


c 


o" 


^ 


lO M N 00 t^ 




■* 




•* 






CT;0O_ ■^^q, l-*^ 




oo__ 


VC 


lO 
















s 


e 


m' m~ 0~ ^ H~ 




tC 





Os 


3 


r^oo M M M 






•fl 


1- •* 


w 


>— > 










rO 




^ 








4©^ 


a 
n 

EH 




o • o • o 


~6 


o 


"vC 


Cl 




o 


(N 


M 





M 





M 


fO 


00 


o_ 


W 





o. 


c 


h O 




















g 


a 


o 


oo" 


M 





M 


r- 


; s 




o 


M 


t^ 


vC 


00 


1/ 


1 t-~ 


>• 


» 


t^ 


o 


■^ 


vC 


«__ 




r^ 


















W ,. 




00 


>o 


lO 




o" 


c 


N oo' 


g W 


>^ 


o 


^ 


t^ 




■* 




■) H 


■2 ^^ 


*3 


00__ 


lO 


M 




fo 


t- 


t^ 


Sg 


l-> 














rO 


fc<C/2 

2s 




^ 












«©^ 




lO 


o 


MD 


"o 


o 


"vC 


rO 






O 


(S 


t^ 







\C 


t^ 


to 


00 


o 


00_^ 





q_ 





°°- 


















a 


o 


d 


S 


oc 


M 


r 


: rT 


M 


VO 


o 


o 


oc 


00 


c 


^ <s 


>J 


»■ 


t^ 


vo 


« 


sC 


vC 


CN 


O 


s 


















V 


M 


ID 


XT, 


CT 


M3 


w 


1 vO 


H 


a 


■o 


>o 


t-~ 




■* 




■> o 


z 


3 


00_^ 


WD 


M 




ro 


r- 


t^ 


O 


I—. 


m 












^ 






1 M . )-i . -1— '^H 




c/a • N(< 










1'- :1^ 


m , O 




4) 


i 












.S|^3^ 


d > <u 




<s3 


X! 












u :S *e 




-4^ 














ua en o 




C/5 

1) a; 














o -" tfi s 1^ t 









V 

9. 


o 
H 






'o-SH-35t3>^ « 


a 

oc 

M 


C C rt 


o 
c 






o c 


CA) 


CAl 


C/2H 




tJ 


'z 






1 



_^ ^ 



o a -u 



. in •* 
'J =« O" o 



3 4) •" 

m H c 

cd ja a 

♦J -1-1 3 

^ a o 

■V — E 

•3 "ttS ,/■ 

i2 s t/2 



" ^ ii 

^ c ">" 

■y c « 

U C rt 

■a B y 

M o n 

u '^ fe 

:3 .:; " 

•a 's a 

a o <u 



tj 3 

S a-g § I 8 

.5 ^ .^ -^ S o 

■5 J3 ^ 

0. ^ to 

V a m 

-o O 4> 

1, B 3 



80^ 

^ 0) 0) 

"o S i 
a a ^ 

O oJ O 



O H 
h * 



« t^ 



c «-» 



u 



4S8 MATERIALS FOR ELEMENTARY ECONOMICS 

132. . PRINCIPLES OF TOKEN MONEY' 

As now understood and practiced, a correct system of token money 
would conform to the following principles: 

1. Such a reduction in weight and value below the standard 
unit as would prevent exportation and yet not place a premium on 
counterfeiting. 

2. Coinage only on government account; that is, no free coinage. 

3. Limited legal- tender power. 

4. Protection against excessive quantity by direct redemption 
on presentation in proper amounts, which also maintains its face 
value. 

As a matter of course, countries have not always had clear con- 
ceptions regarding this kind of money, so that the principles just 
enumerated have come forth only by a process of evolution out of 
experience. For example, in the United States the first rule was not 
observed until 1853; not until it was discovered that the same causes 
which led to the disappearance of the dollar piece (of 371I grains pure 
silver) soon after 1834 also removed the subsidiary coins (two halves 
or four quarters, etc., then also containing 371^ grains pure silver). 
This was the reason why we were driven to such shifts to use foreign 
coins for small change. In 1853, our subsidiary coins were reduced 
to 345.6 grains of pure silver for two halves, four quarters, or ten 
dimes. This reduction in weight by about 6 per cent kept the bulUon 
value of the token coins below that of both the gold and silver dollars, 
and they circulated freely. They were worth more as small change 
than as bullion. 

As regards the second law it is evident that if coins are issued at a 
value above the cost of the bullion in them, the issuer gains this 
profit, or seigniorage. Hence the coinage should not be allowed to a 
private person but should be restricted to the state, to which the profits 
should accrue. This is all the more necessary if the duty is laid 
upon the state to redeem the coins upon demand. 

The reason for the third law is obvious. The standard coins 
being ordinarily issued only in multiples of a unit, there must fre- 
quently be fractional sums represented in a debt; and the same con- 
siderations which demand that the kind of money to satisfy the major 
part of the debt shall be clearly defined in law, also require that 

' From Report of the Monetary Commission of the Itidianapolis Convention (1898), 
pp. 1 13-16. 



MONEY AND PRICES 459 

some method of legally satisfying the fractional portions should be in- 
dicated. Consequently, the token coins are made legal tender for this 
purpose. On the other hand, a payment of a debt in large amounts 
of over-valued coins, these being of small denomination and hence 
heavy and cumbrous in large sums, would be a serious inconvenience. 
If, therefore, the legal-tender quality conferred on token coins were 
unlimited, the power might be abused by a captious debtor, who 
might insist on making some large payments in these coins for the 
purpose of annoying the creditor. Minor and subsidiary coins 
have usually been made a legal tender, therefore, only to limited 
amounts. 

A person obliged to make remittances abroad might have been 
paid here in over-valued token coins, which, not being worth in 
foreign countries more than the bullion they contained, would be 
short payment and could not be used abroad. Unless he could 
exchange token coins for full-valued standard coins which would be 
equally good abroad as well as at home, he would find business 
decidedly venturesome. Consequently the necessity for the fourth 
law becomes at once apparent. Indeed, redemption is a fundamental 
necessity for a system of token coins. Inasmuch as no government 
can ever foretell the amount which the community will absorb, it must 
be ready to freely provide token coins in exchange for standard coins 
whenever needed; and to prevent an excess from clogging the tills of 
merchants it must be equally ready to pay out standard coins in ex- 
change for token coins whenever the latter are sent in to the Treasury. 
Thus free exchange of token coins for gold and of gold for token 
coins, is the only proper method by which an excess in quantity 
is automatically prevented. If wanted, they are obtainable; if 
redundant, they are inevitably withdrawn. Without a method of 
redemption direct or indirect, token or debased coins would certainly 
go to a discount if issued to excess, because, not being received equally 
with standard coins, a discrimination against them would mani- 
fest itself. Not having in themselves a value equal to their face 
value, they must borrow the deficiency only from the process by 
which they can be exchanged at par with full-valued coins. By 
the act of 1879 subsidiary coins may be exchanged for lawful money 
ih sums of twenty dollars and multiples thereof. 

In addition to the removal of excessive issues from the circulation, 
redemption of token coins performs an important function in the 
distribution and redistribution of such coins as are needed. Without 



46o MATERIALS FOR ELEMENTARY ECONOMICS 

redemption, nickels, for example, would accumulate in large amounts 
on the hands of the street car companies; for it would be inconvenient 
or impossible for these companies to find those who might want small 
change, and it would be difficult for them to get rid of large accumula- 
tions at full value. But the system of redemption offers the means 
whereby those who have too much can dispose of their surplus, and 
those who have not enough can get more. The Treasury thus acts 
as a distributor of the supply of token coins. 

Lastly, the community will need only a limited amount of token 
coins for small change. What this sum will be can be determined 
only by experience. No one can foretell how many dimes or quarters 
will be needed in the daily transactions in which money is necessarily 
used. There must, therefore, be freedom in issuing all that is 
wanted. Safety is to be found in a prompt redemption of those 
which the public do not need. In small denominations a very large 
number of pieces may be required, but the total value may be 
inconsiderable; for larger denominations of no greater number of 
pieces the total sum may be quite important. The inconvenience 
of not having money for large and small change is so great that if 
the government did not provide it in a form that will circulate 
(as before 1853 and again in July 1862) some substitutes are neces- 
sarily provided by merchants. The demand for token coins is there- 
fore, up to a certain limit, strong and steady, and if the issues are 
within this limit there will be no net redemption. The coins presented 
by one individual or class will be withdrawn by others for use in the 
channels where they are wanted. 



MONEY AND PRICES 



461 



133. PRODUCTION OF GOLD AND SILVER IN THE WORLD 

SINCE 1492' 

[From 1493 to 1885 is from a table of averages for certain periods compiled by Dr. Adolph Soetbeer; 
for the years 1886 to 1910 the production is the annual estimate of the Bureau of the Mint.] 





Fine Ounces of 


Fine Ounces of 












Gold 


Silver 


Percentage of Production 




000 Omitted 


000 OmrTED 










Period 






• ii .'. 














Annual 
Average 
for Period 


Total for 
Period 


Annual 
Average 
for Period 


Total for 
Period 


By Weight 


By Value 






















Gold 


Silver 


Gold 


Silver 


1493-1520.. . 


186 


S.221 


1.511 


42,309 


II 


89 


66.4 


33.6 


1521-1544- • • 


230 


5.524 


2,899 


69.598 


7-4 


92.6 


55-9 


44.1 


1545-1560. . . 


273 


4,377 


10,017 


160,287 


2.7 


97-3 


30.4 


69.6 


1561-1580. . . 


219 


4.398 


9,628 


192.578 


2.2 


97.8 


26.7 


73-3 


1581-1600.. . 


237 


4.745 


13.467 


269,352 


1-7 


98.3 


22 


78 . 


1601-1620. . . 


273 


5,478 


13.596 


271,924 


2 


98 


24.4 


75.6 


1621-1640. . . 


266 


S.336 


12,654 


253,084 


2.1 


97.9 


25.2 


74.8 


1641-1660. . . 


281 


5,639 


11,776 


235,530 


2.3 


97.7 


27.7 


72.3 


1661-1680. . . 


297 


5.954 


10,834 


216,691 


2.7 


97-3 


30. 5 


69-5 


1681-1700.. . 


346 


6,921 


10,992 


219,841 


31 


96.9 


33.5 


66.5 


1701-1720.. . 


412 


8,243 


11.432 


228,650 


3-5 


96.5 


36.6 


73-4 


1721-1740... 


613 


12,268 


13.863 


277,261 


4.2 


95.8 


41.4 


58.6 


1741-1760.. . 


791 


15.824 


17.140 


342,812 


4.4 


95.6 


42.5 


57.5 


1761-1780.. . 


66s 


13.313 


20,985 


419.711 


31 


96.9 


33.7 


66.3 


1781-1800.. . 


571 


11.438 


28,261 


565,235 


2 


98 


24.4 


75.6 


1801-1810.. . 


571 


5.715 


28,746 


287,469 


1.9 


98.1 


24.1 


75.9 


1811-1820. . . 


367 


3.679 


17.385 


173,857 


2.1 


97-9 


25.3 


74-7 


1821-1830.. . 


457 


4,570 


14.807 


148,070 


3 


97 


33 


67 


1831-1840.. . 


652 


6,522 


19.175 


191,758 


M 


96.7 


35.2 


64.8 


1841-1850.. . 


1,760 


17,605 


25,090 


250,903 


6.6 


93-4 


52.9 


47.1 


1851-1855... 


6,410 


32,051 


28,488 


142.442 


18.4 


81.6 


78.3 


21.7 


1856-1860. . . 


6,486 


32,431 


29.095 


145.477 


18.2 


81.8 


78.1 


21.9 


1861-1865... 


5.949 


29,747 


35.401 


177,009 


14.4 


85.6 


72.9 


27.1 


1866-1870. . . 


6,270 


31,350 


43,051 


215,257 


12.7 


87-3 


70 


30 


1871-1875.. . 


S.S9I 


27,955 


63.317 


316,58s 


8.1 


91.9 


58. S 


415 


1876-1880.. . 


5.543 


27,715 


78,775 


393,878 


6.6 


93.4 


53 


47 


1881-1885.. . 


4.794 


23.973 


92,003 


460,019 


5 „ 


95 


45-5 


54. 5 


1886-1890.. . 


5,461 


27.306 


108,911 


544,577 


4.8 


95.2 


44.5 


55-5 


1891-1895 . . . 


7.882 


39.412 


157.581 


787,906 


4.8 


95.2 


44-4 


55.6 


1896-1900. . . 


12,446 


62,234 


165.693 


828,466 


7 „ 


93 


54-6 


45.4 


IQOl 


12,625 


12,625 


173.011 


173.011 


6.8 


93.3 


53.8 


46.2 


1902 


14.354 


14,354 


162,763 


162,763 


8.1 


91.9 


S8.S 


41-5 


1903 


15.852 


15,852 


167,689 


167,689 


8.6 


91.4 


60.2 


39-8 


1904 


16,804 


16,804 


164,195 


164,195 


9-3 


90.7 


62.1 


37.9 


I9OS 


18,396 


18,396 


172,317 


172,317 


9.6 


90.4 


63.1 


36.9 


1906 




19,471 




165,054 


10.5 


89-5 


65.3 


34-7 


1907 




19,977 




184,206 


9.8 


90.2 


63.4 


36.6 


1908 




21,422 




203,131 


9-5 


90. 5 


62.8 


37.2 


1909 




21,696 




210,453 


9 4 


90.6 


62.5 


37. 5 


1910 




21,996 




222,879 


9.0 


91 .0 


61 . 2 


38.8 


Total... 




669,828 




10,654,233 


5 9 


94 I 


SOI 


49-9 



' Adapted from Circular No. 52, United States Treasury Department (1912), pp. 64-65. 



462 



MATERIALS FOR ELEMENTARY ECONOMICS 



134. COMMERCIAL RATIO OF SILVER TO GOLD ANNUALLY 

SINCE 1687^ 

Note. — From 1687 to 1832 the ratios are taken from Dr. A. Soetbeer; from 1833 to 1878 from 
Pixley and Abell's tables, from 1879 to 1894 from daily cablegrams from London to the Bureau of the 
Mint; and since that time from daily quotations in the public press. 



Year 



1687 
1688 
1689 
1690 
1691 
1692 
1693 
1694 
169s 
1696 
1697 
1698 
1699 
1700 
1701 
1702 
1703 
1704 
1 70s 
1706 
1707 
1708 
1709 
1710 
1711 
1712 
1713 
1714 
171S 
1716 
1717 
1718 
1719 
1720 
1721 
1722 
1723 
1724, 
1725. 
1726, 
1727, 
1728. 
1729. 
1730. 
1731 



Ratio 



14.94 
14.94 

IS-02 
IS-02 
14.98 
14.92 
14.83 
14.87 
IS-02 
15.00 
15 -20 

IS -07 
14-94 
14.81 
IS07 
15-52 
15-17 

15-22 

15-I1 
iS-27 
15.44 
15-41 
IS-31 

15-22 
15-29 
15-31 
15-24 

IS-I3 
15 -II 
IS -09 
15-13 
15-11 
15 09 
15-04 
iS-05 
1S-17 
15-20 
iS-ii 
15-II 
IS -15 
15-24 
15-11 
14.92 
14.81 
14.94 



Year 



1732 
1733 
1734 
1735 
1736 
1737 
1738 
1739 
1740 
1741 
1742 
1743 
1744 
1745 
1746 
1747 
1748 
1749 
1750 
I75I 
1752 
1753 
1754 
1755 
1756 
1757 
1758 
1759 
1760 
1761 
1762 
1763 
1764 
1765 
1766 
1767 
1768 
1769 
1770 
1771 
1772 
1773 
1774 
177s 
1776 



Ratio 



Year 



1777 
1778 
1779 
1780 
1781 
1782 
1783 
1784 
1785 
1786 
1787 
1788 
1789 
1790 
1791 
1792 
1793 
1794 
1795 
1796 
1797 
1798 
1799 
1800 
1801 
1802 
1803 
1804 
1805 
1806 
1807 
1808 
1809 
1810 
1811 

l8l2 

1813 
1814 
1815 
1816 
1817 
1818 
1819 
1820 
1821 



Ratio 



14-54 
14-68 
14-80 
14.72 
14-78 
14-42 
14.48 
14.70 
14-92 
14.96 
14.92 
14-65 
14-75 
15 04 
15-05 
1S-17 
15 -00 
15.37 
iS-SS 

I5-6S 
15.41 

15-59 
15-74 
15-68 
15-46 
15.26 
15-41 
15-41 
15.79 
15-52 
15-43 
16.08 
15-96 
15-77 
15-53 
16.11 
16-25 
15-04 
15-26 
15-28 
15-I1 
15-35 
iS-33 
15-62 
1S-9S 



Year 



1822 
1823 
1824 
1825 
1826 
1827 
1828 
1829 
1830 
1831 
1832 
1833 
1834 
1835 
1836 
1837 
1838 
1839 



1842 
1843 
1844 
1845 
1846 
1847 
1848 
1849 
1850 
1851 
1852 
1853 
1854 
I8SS 
1856 
1857 
1858 
1959 
i860 
1861 
1862 
1863 
1864 
1865 
1866 



Ratio 



IS -80 
IS -84 
iS-82 
15.70 
15.76 
15.74 
15.78 
15.78 
15.82 
15.72 
15.73 
15.93 
15.73 
15.80 
15.72 
IS -83 
IS. 85 
15.62 
15.62 
15.70 

15.87 

15.93 

15.8s 

15.92 
15.90 
15.80 

IS. 85 

15-78 

15.70 
15.46 
15.59 
15.33 
15.33 

IS-38 
15-38 

15-27 

1S.38 
15-19 
15.29 
15-50 
15-35 

iS-37 
15-37 
15-44 
IS -43 



Year 



1867- 
1868. 
1869. 
1870- 
1871. 
1872. 
1873. 
1874. 
1875- 
1876. 
1877. 
1878. 
1879. 
i88o. 



1883. 
1884. 



1890. 
1891. 
1892. 
1893- 
1894. 
1895. 
1896- 
1897- 
1898- 
1899. 
1900 - 
1901 . 
1902. 
1903 . 
1904., 
1905.. 
1906. , 
1907.. 
1908. . 
1909. . 
1910. . 
1911 . . 



Ratio 



15-57 
15-59 
IS -60 
15-57 
15.57 
IS -63 
15-92 
16.17 
16. 59 
17.88 
17.22 
17.94 
18.40 
18. OS 
i8.i6 
18.19 
18.64 
18.57 
19-41 
20.78 
21.13 
21.99 
22.10 
19.76 
20.92 
23-72 
26.49 
32.56 
31.60 
30.66 
34.20 
35-03 
34-36 
33-33 
34-68 
39-15 
38-10 
35-70 
33.87 
30-54 
31-24 
38.64 
39.74 
38.22 
38.33 



' From Circular No. 52, United States Treasury Department (1912), p. 75. 



MONEY AND PRICES 



463 



135. GRESHAM'S LAW: FRENCH COINAGE, 1817-1869' 




ISt.l 



ISt.l 



In the upper diagram the continuous line shows the annual coinage of gold^ 
in millions of francs; the dotted line shows the annual coinage of silver, in millions 
of francs. The curve in the lower diagram indicates the course of fluctuations in 
the market ratio of silver to gold. The mint ratio was maintained during the whole 
period at 15^ to i. 

' Diagram plotted from data given by J. Laurence Laughlin, History of Bimetal- 
lism in the United States, 4th ed., pp. 340-41. D. Appleton & Co., 1900. 



464 MATERIALS FOR ELEMENTARY ECONOMICS 

136. INCREASE IN THE WORLD'S PRODUCTION OF GOLD, 

I 800-1 906' 

The rapid increase in the annual production of gold of the world is 
a feature which has been the subject of much discussion in its relation 
to the monetary systems and financial affairs generally. The facts 
are best brought out in the accompanying diagram. California and 
Australia in the early fifties brought the production rapidly to $180,- 
000,000 from about $10,000,000 in 1830. The output in the earlier 
part of the century was largely derived from Russia. The gradual 
decay of placer mining in California and Australia reduced the yield 
for the world to nearly $100,000,000 about 1886. In the period from 
1885 to 1890 numerous discoveries in South Africa, in Western Aus- 
tralia, and in Colorado changed the aspect of the industry. 

The cyanide process, which gave better extraction at reduced cost, 
was introduced about this time. In South Africa especially this pro- 
cess has proved of the utmost importance. A little later discoveries 
were made in Alaska, Nevada, the Canadian Yukon, Mexico, Rhodesia, 
and West Africa, notwithstanding the assertion made by many that 
no further important supplies of gold were likely to be found. 

Thus, since 1887 the production of the world has been trending 
upward, except for the temporary decline due to the Boer War, and in 
1907 was about $412,000,000. It will be observed that Africa now 
(1907) contributes about $151,000,000 or one-third of the world's 
production, and of the African output about $133,000,000 comes from 
a small district in the Transvaal. 

Barring new and unexpected discoveries it is believed that the 
world's production will not increase hereafter at the recent rapid 
rate of advance. It is believed that the maximum production has 
nearly been reached in the Transvaal, although the present output can 
be maintained for a long time, probably for more than thirty years. 
The output of Australia from present indications is more apt to 
decline than to increase. 

As indicated by the diagram, the production of Russia forms a 
solid and constant substratum on the permanence of which it is fair 
to rely. A continued increase in the United States is scarcely to be 
expected, although the recent history of gold mining in Nevada 

■ Adapted from the Report of the National Conservation Commission (1909), III, 
526-27. 



MONEY AND PRICES 



465 



shows what unsuspected riches may lie for decades within easy reach. 
It is true that there are large unprospected territories in South 
America which with developing Unes of communication may produce 



Zl(>l 
1161 
OICI 

9061 
i06l 


in 
a: 

•» 
-1 
-1 




400,000.000 
375,000,000 
350,000.000 
325.000,000 
300,000,000 
275.000,000 
250,000,000 
225.000,000 
200, 000.000 
175.000,000 
150,000,00 
125.000,000 

roo,ooo,ooo 
75.000,000 
50,000,000 
25,000,000 































1 — 




— 1 SI6I 


































— Ma 



































— CI6I 


































— 2161 




































































— 0161 






































































9061 
S06I 






































-^ 


11 




















1 






er 




n 


h 












*06l 
{061 
2061 

1061 
0061 
6681 
8681 
i68l 
9681 
S68I 
^681 
C68I 
2681 

1681 
0681 
6881 
8881 

zsei 

9881 

seei 

0891 
Si8l 
0^81 
S98I 
0991 
SS9I 
0S9I 
0t« 

ocei 

0281 

oiei 

0091 






^ 


,. 


















< 






5 ^ 




\ 'c 






It) 




±. SOU 










^ 




















< 


\ 


V 


ffe 










5: V06I 














■o^ 






Li. 






1- 






(0 / 


"^ 


> 


< 


ji 


of ^'*' 












■*< 


R 






Ifl 




] 


II r^ 


gz 




(0 


H 


0: 3061 














\^ 




< 




Li... 


-r 


M* 




Q 


P 


1 0061 












-nT 




\, 






I^„ 


■^-m 


^— 




bJ 














<\ 






Y>o- 




A 


w 




^ 


Z 




^ 6681 


















* 


s^ 






^ 


jtwt> 


J^ 


D 






















-^ 




r- 


>>: 


r<i 


\^ 


s^ 


^ 


, 


pi 




















"I 


y 




l\ 




1 




^ 


N 


i 




" S69I 
























J 




N;i 










< 




•s. 


r 


^ 




■ --r 


-- 






















<s 


s 


A 






fr 




rrt 
























^ 


>>T 


V 


^Hf 








- 2691 
























\, 


^ 




•^ 


























jV] 






li:r 




























XL 


llpj 






























^^ 


vlii 




irp 




























^ 








'^ 
































[£t± 


IJ SMI 
3 S99I 




























\ 






|r!i 


























y 






lift 


























) 










































/ 
































V-4 








»■ 


























-V 


1 






























V 


¥ 






























' — 




=^ 




;: 0S8I 
































































1 


E: °*^' 


































^ 0281 
J 0191 

3oo«i 












































___J 




































c 






c 



















^ 


. 




_ 













« 




Ph 


a 




a 


M 


rt 


S 


ti 


H 






T3 


iM 







m 





H 


< 


h 



R5 



much gold, but on the whole the probabihties of the immediate 
future are rather in favor of maintenance of the present level of 
output than of a further sensational advance. 



466 MATERIALS FOR ELEMENTARY ECONOMICS 

137. THE INCREASED COST OF LIVING' 
Tabular Outline of Factors That Determine the Cost of Living 

I. Cost of living includes: 

1. Economic expenditures, or such as contribute to efficiency. 

2. Uneconomic expenditures, or such as do not contribute to efficiency. 
The chief items of expenditure in the first class are: 

a. Rent. 
h. Food. 

c. Clothing. 

d. Fuel and light. 

e. Sundries, including outlay for health, recreation, amusement, 
education, religion and government. 

The second class includes: 

A . Individual wastage. 
a. Drink. 

l. Luxury. 

c. Amusement. 

d. Domestic waste. 

B. Social wastage. 
a. War. 

h. Governmental extravagance. 

c. Crime, pauperism, insanity, accident, disease, unemploy- 
ment, and the like. 

II. The cost of living should be considered not only absolutely, as above, 
but relatively, as shown by proportion of expenditures to incomes: 
a. Wages. \ 
h. Salaries. \ \ e. Leisure. 

c. Profits. ( ( /. Idleness. 

d. Interest. / 

III. The prices of commodities and services that constitute the items of 
expenditure, classified above, are determined by supply, by demand 
and by value of money. 
I. Supply depends on expenses of production. 

a. Natural resources and marginal productivity of land. 
h. Ordinary competitive expenses: 
(i) Interest on capital. 

(2) Profits of management. . 

(3) Cost of labor, as determined by wages, hours and efficiency. 

' Adapted from the Report of the [Massachusetts] Commission on the Cost of 
Living (1910), pp. 193-97, 635-36, 529-31- 



MONEY AND PRICES 467 

c. Effects of legislation : 
(i) Sanitary laws. 

(2) Food laws. 

(3) Labor laws. 

(4) Tariff laws. 

d. Effects of combination, 
(i) Capital — trusts. 
(2) Labor — unions. 

e. Effects of wastage: 

(i) Public and private extravagance. 

(2) Planless and wasteful methods of production and distribu- 
tion. 
/. Effects of improvements and inventions. 

2. Demand depends on: 

a. Size and growth of population, as governed by birth rate, death 
rate, immigration. 

b. Amount of incomes. 

c. Standard of living, as influenced by advance of culture, growth 
of cities, custom and fashion, habits of spending and saving. 

3. Value of money depends on: 
a. Supply of gold. 

h. Currency system. 
c. Use of credit. 

CAUSES OF INCREASE OF COST OF LIVING 

On the basis of the foregoing analysis of the factors that enter 
into the determination of the cost of living, we may proceed to 
classify the causes that have brought about the recent advance of 
prices. These causes fall into two main groups: First, increase of 
uneconomic expenditures, through waste, destruction and general 
extravagance; second, increase of economic expenditures, brought 
about by rise of prices. 

The chief items in the increase of uneconomic expenditures are 
enlarged outlay for war and national armaments, higher scale of 
governmental expenditure in general, and cost of the burden of crime, 
pauperism, insanity, accident, disease, unemployment and other 
forms of social wastage. These are all items of public and social 
expenditure. Meanwhile, also, individual expenditure of an uneco- 
nomic character has increased, including outlay for drink, luxury, 
amusement and wasteful or injurious forms of consumption. 

The factors that have contributed to bring about an advance of 
prices, and a consequent expansion of necessary expenditure, fall into 



468 MATERIALS FOR ELEMENTARY ECONOMICS 

three main groups: influences affecting the supply of commodities 
and services; changes in the demand of consumers; and fall of the 
value of money. Obviously, there are only three ways in which any 
particular influence can operate to bring about an advance of prices: 
it must either affect supply, restricting it or making production more 
expensive; or it must act upon demand, extending the consumption 
of goods; or it must alter the money standard in which values are 
measured and prices are expressed, causing it to depreciate. During 
the last decade a variety of forces have worked upon prices through 
these three channels, tending to diminish supply, to increase demand 
and to reduce the value of money. The resultant of these combined 
influences is expressed in the higher index numbers of general prices 
in all countries of the world. 

The main influences that have worked to restrict supply are the 
drain of population from the land, resulting in decreasing the propor- 
tion of persons engaged in agricultural production; the exhaustion of 
natural resources, resulting in increasing expenses of production or 
diminishing returns to capital and labor; and wasteful methods of 
production and distribution, especially the latter. Of particular 
importance in the field of economic waste are needless multiplication 
of middlemen and of charges in the passage of commodities from the 
source of supply to the door of the consumer; excessive expenditure 
for advertising purposes; adulteration and debasement of quality; 
and distribution of foods in packages, involving in many cases short 
weight and high cost. The influence of the tariff, that of the trusts, 
and that of the labor unions must be considered here as possible 
factors in the advance of prices. Also, the development of legislation 
for the control of production and distribution, in the shape of sanitary 
requirements, pure food laws, and labor codes is a factor of consider- 
able importance. 

The changes in reference to demand have come about through 
the growth and concentration of the population in cities, the general 
advance of the standard of living, bringing larger requirements on the 
part of the individual consumer, and the national tendency toward 
extravagant expenditure. The last influence works in two ways to 
advance prices: it not only increases demand, but it also reduces 
supply, through the total destruction or partial utilization of goods. 

Finally, the fall in the value of money has been brought about by 
the great increase of the gold supply, the inflation of the currency 
through the issue of paper money in various forms, and the extension 



MONEY AND PRICES 469 

of credit in general. As the supply of money increases, the value of 
the unit or standard must fall, other things being equal. In other 
words, the measure of value shrinks as the money commodity becomes 
more abundant, and the result is expressed in advanced prices. The 
extension of credit operates to diminish the demand for gold, and in 
some cases to increase the utility or effectiveness of the money supply, 
tending thus to reduce its value in two ways. Apart from the general 
influence of the enlarged supply of money in raising prices, an increase 
of the gold supply works upon prices in a very direct and potent way. 
The gold is exchanged for certificates, and the certificates are deposited 
in banks, becoming reserves. On the basis of these reserves the banks 
extend their loans, money becomes easy, business is stimulated, and 
prices are affected immediately and powerfully. 

The classification of the causes of the increased cost of living thus 
presented may be outlined in tabular form as follows: 

I. Increase of uneconomic expenditures: 

1. Social wastage. 

a. War and national armaments. 

b. Higher scale of governmental expenditure. 

c. Increasing cost of burden of crime, pauperism, insanity, accident 
disease, unemployment and the like. 

2. Individual wastage. 

a. Drink. 

b. Luxury. 

c. Amusement. 

d. Domestic waste. 

II. Increase of economic expenditures in consequence of higher prices. 
The causes of the advance of prices may be classed as: 
I. Changes in supply. 

a. Drain of population from the land. 

b. Exhaustion of natural resources. 

c. Wasteful methods of production and distribution, 
(i) Transportation. 

(2) Wholesale and retail costs. 

(3) Advertising. 

(4) Adulteration, 
(s) Package foods. 

d. Tariff. 

e. Trusts. 

/. Labor unions, 
g. Legislation. 

(i) Sanitary laws. 

(2) Pure food laws. 

(3) Labor laws. 



470 



MATERIALS FOR ELEM-ENTARY ECONOMICS 



2. Changes in demand. 

a. Growth and urban concentration of population. 

b. General advance of standard of living. 

c. Extravagance in expenditure. 

3. Changes in value of money. 

a. Increase of gold supply. 

b. Inflation of currency. 

c. Extension of credit. 

ANALYSIS OF CURRENT EXPLANATIONS OF HIGH PRICES 

The causes of the recent advance of prices have been discussed 
by economists and expert observers in various articles in the maga- 
zines and reviews of the last six months. The contributions to this 
discussion are marked by a wide variety of opinion. There is, how- 
ever, a striking consensus of opinion regarding one cause of the 
upward price movement, namely, the increased production of gold. 
The following table presents an analysis of the causes assigned for 
the increase of prices by the writers of thirty articles that have 
appeared in print since January i, 19 10: 



Causes 




Contributory- 
Cause 



1 . Increase of gold supply 

2. Exhaustion of natural resources 

3. Rising standard of living 

4. Withdrawal of population from agriculture, and 

growth of cities 

5 . Trusts and combinations 

6. Tariff 

7. Labor unions 

8. Growth of population, and unscientific methods 

of farming 

9. Extravagance in expenditure 

10. Waste and fraud in distribution 

1 1 . Uneconomical marketing and housekeeping .... 

12. Speculation 

13. Immigration 



10 
7 
3 

4 
6 

5 
3 
3 



The figure given in the first column of the table, under the head 
"Principal Cause," indicates the number of writers who assign the 
chief importance to the factor in question; that given in the second 
column, "Contributory Cause," shows the number who regard the 
influence of the cause enumerated as secondary. It appears that 17 
out of the 30 writers attribute the advance of prices mainly to the 
increase of the gold supply; 4 others regard this cause as of secondary 
importance. Exhaustion of natural resources, resulting in dimin- 



MONEY AND PRICES 471 

ished returns from agriculture, increased expenses of production and 
pressure of population on the land, is given the first place by 4 writers; 
8 others ascribe secondary importance to this factor. A rising 
standard of living is believed to be the primary cause of higher prices 
by 2 of the contributors to the recent discussion; 3 others assign some 
weight to this influence. Withdrawal of population from agriculture, 
and growth of the cities, which are both consequences of the concen- 
tration of population, are regarded as the main factor by only 2 
writers, and as a secondary cause by i. The growth of population 
in general, combined with unscientific methods of agriculture, result- 
ing in disproportion between the population and the food supply, is 
selected as the first cause by i observer; this cause is given secondary 
importance by 4 others. Two writers place the responsibility chiefly 
upon trusts and combinations, and 10 others assign more or less 
importance to this cause. The tariff is assigned as the primary 
cause by only i writer, but is held to be a contributory influence by 
7 others. Similarly, the influence of labor unions is declared to be 
the chief cause by i person, and is mentioned also by 3 others. The 
foregoing are the only influences that are regarded as chief factors in 
the advance of prices; the others are regarded by all the writers as 
of secondary importance, in varying degrees. 

FINDINGS OF THE COMMISSION 

The findings of the commission with regard to the causes of the 
recent advance of prices are as follows: 

1. The primary cause of the world-wide advance of prices since 
1897 is the increase of the gold supply, which has reduced the pur- 
chasing power of money and brought about a corresponding increase 
of values measured in money in all the leading commercial states, and 
at least in the United States has served as the basis for a vast exten- 
sion of credit. 

2. The advance of prices in the United States has been accelerated 
greatly by the enormous waste of income, through uneconomic 
expenditure for war and national armament and through multiple 
forms of extravagance, both public and private, and of wastage, both 
individual and social. The increasing burden of disease, accident, 
crime and pauperism imposed upon society, and the loss through 
expenditure on a rising scale for luxuries and through wasteful methods 
of management in the household, have been potent contributing 
factors to the advance of the costjof living. 



472 MATERIALS FOR ELEMENTARY ECONOMICS 

3. The advance of prices has been further promoted by a com- 
plexity of causes, operating on the side of supply to reduce the volume 
and increase the expenses of production, and on the side of demand 
to extend and diversify the consumption of commodities. The main 
factors in restricting supply and enhancing the cost of commodities 
are the drain of population from the land, which has decreased the 
proportion of persons engaged in producing the food supply; the 
exhaustion of natural resources, which has resulted in increased 
expenses of production or diminished returns from the soil; and 
uneconomic methods of production and distribution, especially the 
latter. The chief influences on the side of demand which have 
worked parallel to the forces affecting supply are the growing con- 
centration of population in great cities, which has increased the pro- 
portion of nonproducing food consumers; the general advance of the 
standard of living, which has enlarged the requirements on the part 
of individual consumers of all classes; and the national habit of 
extravagance, which has further extended and diversified the demand 
for comforts and luxuries created by the advance of the standard of 
living. 

4. With regard to the tariff, the trusts and the unions, which 
have been declared to be either primary or contributory causes of 
the high cost of living, the commission finds that none of these 
factors can be regarded as a direct and active cause of the recent 
increase of prices. 

With regard to the tariff, the facts that prices have fallen and 
risen during long periods without relation to changes in duties; that 
prices have been rising in Great Britain, under free trade; and that 
large increases have taken place in the prices of commodities not 
appreciably affected by the tariff, show conclusively that the tariff is 
not a factor in the recent upward movement of prices in this country. 
On the other hand, however, it is clear that in a period of rising prices 
like the present the tariff cuts off possible relief to consumers by closing 
access to the cheapest sources of supply in the world's markets. In 
the past the duties on the necessities of common consumption, food 
stuffs, have been largely inoperative, because the country produced 
not only its own food supply, but a large surplus for exportation. 
The United States appears, however, to be approaching rapidly the 
turning point, when it will become, instead of a food-exporting, a 
food-importing country. Under these conditions, as the duties on 
food stuffs become actually operative, their effect must be to increase 



MONEY AND PRICES 473 

the cost of living to wage earners and the expenses of production to 
manufacturers, thus hampering the development of industry and 
defeating the very purpose of the protective policy. The commission 
is therefore of the opinion that when the tariff shall further be revised, 
the expediency of removing all duties on food products should be 
considered carefully by the national Congress; and it hopes that the 
tariff commission will be equipped with such funds and powers as may 
be necessary for researches adequate as a basis for future changes, 
to be founded on commercial rather than political considerations. 

With reference to the trusts, the facts that the prices of trust- 
controlled commodities have not risen conspicuously ; that prices have 
advanced in other countries in which trusts have not developed on the 
American scale; and that the higher prices of food products, includ- 
ing meat, are accounted for by natural causes and are not to be 
attributed to combination in any considerable degree, indicate that 
the trusts cannot be held responsible for the late great advance of 
prices. On the other hand, however, combination undoubtedly 
enables a group of producers to take advantage of any conditions that 
may tend to advance prices and to maintain a high price level once 
established. Under existing conditions, constant vigilance with 
reference to the action of combinations, especially those dealing with 
the necessities of life, is doubly incumbent on all oflficials intrusted 
with the enforcement of laws against monopoly and combined regu- 
lation of prices. 

Concerning the labor unions, the facts that less than lo per cent 
of the workers of the country are organized; that the workers engaged 
in the production of the commodities that have risen most notably 
in price, especially food stuffs, are hardly organized at all; and that 
wages have risen in less degree and at slower pace than the prices of 
commodities, the wage advance beginning some time after the price 
advance, prove that the recent increase of prices cannot be attributed 
to the influence of trade unions. Concerning the deeper question of 
the general influence of reduction of hours, increase of wages and 
trade union policies upon expenses of production, prices and cost of 
living, the commission expresses no opinion, on account of the impos- 
sibility of determining the exact facts required for an impartial answer 
to this question within the time allowed for its investigation. 



474 MATERIALS FOR ELEMENTARY ECONOMICS 

138. THE CORRECTION OF PRICE-CHANGES' 

Historical attempts to correct price changes may be grouped into 
four classes. First are the well-known instances of efforts of the 
authorities in almost every country to fix the prices of staple products. 

The second method to which resort has been had for preventing 
the alleged loss from price changes is the attempt to find an ideal or 
unvarying standard. Accounts of this are to be found in theoretical 
literature rather than in legislation or social programs. 

The third class of proposals includes those which would change 
the money supply without statistical information indicating the 
amount of change needed, or the degree of rapidity with which 
it should proceed. The most important of these proposals is bimet- 
allism. 

The fourth method, known as the tabular standard, is that which 
attempts to determine the change in the average of prices and to pay 
in money in amounts proportionate to the degree of this change. A 
variation of this fourth method is proposed by Professor Irving Fisher. 
He would regulate the price average by controlling the money supply 
through a seigniorage charge determined by the tabular standard. 
This is really an indirect way of applying the tabular standard. 

139. A COMPENSATED DOLLAR^ 

The following plan, which may be called "the adjustable seign- 
iorage plan," is an attempt to make the purchasing power of the 
dollar constant. We have at present a gold dollar of constant weight, 
but of varying purchasing power. We need a dollar of constant 
purchasing power and varying weight. 

The present proposal is to increase and vary, from time to time, 
the weight of the bullion dollar,^ without necessarily disturbing the 
weight of the coined dollar. Suppose, for instance, that the bullion 
dollar had been gradually increased since 1896 until today it were 50 
per cent heavier, or 38 . 7 grains, while the coined dollar were still 25.8 
grains. This means that the government would redeem on demand 

' Adapted from David Kinley, "Objections to a Monetary Standard Based on 
Index NumberSj" in the American Economic Review, III, 2 (March, 1913). 

* Adapted from various writings of Irving Fisher. 

3 " Bullion dollar " means the weight of bullion which the owner of gold coin can 
get for it by redemption. 



MONEY AND PRICES 475 

each coined gold dollar in 38.7 grains of gold bullion. Gold dollars 
would then be mere tokens — like brass checks — entitling the holder 
to gold bullion just as our gold certificates now entitle the holder to 
so much gold (coin or bullion) in the United States Treasury. As to 
convertibility in the other direction, the government mint would 
stand ready to give back a coined gold dollar for each 38.7 grains of 
bullion plus a slight coinage fee or "brassage " of, say, i per cent. This 
brassage charge would serve, as afterward explained, to prevent loss to 
the government by speculation. If i per cent, it would be 0.387 
grains, to be added to the 38.7, making 39.087 grains in all as the 
bullion required at the mint to secure a "coined dollar." 

The difference between the bullion required by the mint (39.087 
grains) and the coin dollar (25.8 grains) is 13.287 grains and would 
be retained by the government to strengthen its bullion reserve for 
redeeming gold coin. Of this 13. 287 only 0.387 is brassage; the 
remainder, 12.9 grains, may for distinction of terms be called seign- 
iorage. Thus in weight the bullion dollar is the coin dollar plus 
seigniorage and the bullion required by the mint is the amount of 
this bullion dollar plus "brassage." 

An obvious proviso in the proposed plan would be that the bullion 
dollar must never be lighter than the coin dollar. The present indi- 
cations are that the dollar, in order to maintain the same purchasing 
power, will need in general to increase; for further depreciation of 
gold seems probable. If, however, it should ever happen that the 
proposed bullion dollar should shrink in weight again to 25.8 grains, 
then the proviso that it should never shrink lower would come into 
operation. It would then have to remain 25.8 until the weight 
required for the bullion dollar should again rise above 25.8 grains. 
So long as it remained 25.8 grains it would cease to be adjustable 
and to maintain a constant purchasing power. We should, during this 
period, simply be in the same condition that we are in at present. 

With a coin dollar weighing 25.8 grains and with the bullion 
dollar never lighter than 25.8 grains, the price of gold bullion can 
never be higher than $18.60. But this limit or barrier can at any 
time be made to recede simply by reducing the weight of the coin 
dollar through recoinage. It might even be advisable, in order to 
secure a wide margin between the coin and the bullion dollar, to begin 
the new system by recoining at the outset all present gold coin into 
coins of less weight, the government keeping the difference as a reserve 
to help create its bullion reserve needed for operating the proposed 



476 MATERIALS FOR ELEMENTARY ECONOMICS 

system. This would, incidentally, have the fiscal advantage of 
saving the expense of creating such a reserve by taxation or loans. 

We come now to another important restriction on changes in the 
weight of the bullion dollar which should be imposed in order to pre- 
vent speculation embarrassing to the government. This restriction 
is that no single shift in the bullion dollar may exceed the extent of 
the brassage. That is, if the brassage is i per cent, no one shift shall 
exceed i per cent. 

If this were not provided but the bullion dollar should at any time 
be raised more than i per cent, if, e.g., the shift was from a bullion 
dollar of 38.7 grains to 40 grains (and from a quantum of bullion 
required by the mint of 39.087 grains to 40.40 grains), the govern- 
ment might be embarrassed by speculation. The new pair of figures 
(40 and 40.40) would both be above the range of the old pair (38.7 
and 39.087); that is, the lower (40) of the new pair would be higher 
than the higher (39.087) of the old pair. When it was known or 
expected that these changes were to be made on a certain date, 
speculators would hurry bullion to the mint in advance of that date 
and for each 39 . 087 grains receive a coin dollar. With this dollar 
they could, as soon as the set date arrived, return and demand redemp- 
tion in 40 grains. Thus they would win over night 40—39.087, or 
0.913 grains on each 39.087 grains originally held. Again, if the 
bullion dollar were changed too much at any time in the opposite 
direction as, say, from 38.7 grains to 37 grains, owners of gold coin 
could get it redeemed in bullion at the old rate today and mint this 
bullion at the new rate tomorrow. Each coin dollar they could 
redeem today in 38.7 grains of gold bullion and tomorrow under the 
new arrangement they could get a dollar from the mint for only 37 
grains plus i per cent brassage, or 37.37 grains, still leaving 38.7 — 
37.37 grains or 0.33 grains of bullion for overnight profit on each 
original dollar invested in the speculation. 

But if the permissible shift in weight of the bullion dollar were 
not over I per cent in either direction, no such profit would be possible. 
The restriction in the shift to i per cent at a time is ample to permit 
of all the movement ordinarily required, provided the shift is made 
often enough. It might be monthly, or 12 per cent per annum; it 
might be bimonthly, or 6 per cent per annum; it might be quarterly, 
or 4 per cent per annum. Moreover, the margin for each shift might 
be narrowed or widened by making the brassage three -fourths of i per 
cent or less, or i§ per cent or more. 



MONEY AND PRICES 



477 



One important question remains : How can we know what changes 
to make from time to time in the weight of the bullion dollar ? The 
answer is: By index numbers of prices, such as those of the United 
States Bureau of Labor, Bradstreet, Gibson, Sauerbeck, The Econo- 
mist, or the British Board of Trade. Any of these would afford a 
good guide and they all agree fairly well. 




jCoiXyieaasie^^ayiui 



When once a system of index numbers is fixed upon, their numeri- 
cal calculation becomes a mere matter of clerical arithmetic. If the 
official index number should show the price level to be, say, one-half 
of I per cent above the base level from which the system started, it 
would become mandatory to increase the gold bullion dollar by one- 
half of I per cent (i. e., to decrease the bullion prices by one-half of i 
per cent), and so on for any increase or decrease — subject, of course, 
to the restrictions above imposed. Thus if the price level were i per 
cent below normal, the bullion dollar could be reduced by only i per 
cent in any one quarter of the year; but the full correction could be 
reached in three quarters unless the deviation were aggravated in the 
meantime; and in that case the correction would follow steadily on 
the heels of the deviation. Except in paper money times there 
never was, I think, a historical case of a persistent rise of prices over 
any large part of the world as great as i per cent a quarter or 4 per 
cent a year for more than two or three years, while the falls of 
prices have been still less violent, excepting after crises. Under the 



478 MATERIALS FOR ELEMENTARY ECONOMICS 

system here proposed there would be little opportunity for crises to 
incubate. 

The plan then in brief is: 

1. To institute an official index number of prices, selecting some initial year 
as the base of reference, the price level for that year being called loo per 
cent. 

2. The government or governments thereafter to readjust the official weight 
of the "bullion dollar" (the quantum of bullion in which it will redeem 
the gold dollar) at regular intervals, say monthly, according to the find- 
ings of the index number. If in any month the index number deviates 
from par, the bullion dollar is to be corrected in proportion to the devia- 
tion, provided, however, 

a) that no one shift in the weight of the bullion dollar shall exceed the 
brassage (say i per cent) nor such stated limits as will safeguard the 
government from injurious speculations and 

b) that the bullion dollar shall in no case be of less weight than the coin 
doUar. 

3. The government to be responsible at all times for redeeming on demand 
gold coins (or certificates) in bullion dollars and for minting bullion at 
the same rate (except for the brassage of, say, i per cent) ; in other words, 
the government to be always ready to sell gold bullion at the redemption 
price and to buy it at the mint-price (the redemption-price less the 
brassage) . 

In summary it may be said that the plan may be called: 

With respect to its purpose: 
A plan to assimilate the gold standard to the multiple standard; 
i.e., to convert the gold standard into a true gold standard. 
i.e., to make a stable dollar. 

i.e., to standardize the dollar as a unit of purchasing power, 
i.e., to change from a gold dollar of constant weight and varying pur- 
chasing power to a gold dollar of constant purchasing power and 
varying weight. 
With respect to the method : 
A plan to make a compensated dollar; 

i.e., to (virtually) increase the weight of the gold dollar to compensate 

for the depreciation of gold, 
i.e., to change the status of gold coins to that of silver coins — tokens, 
or mere "brass checks," so to speak, entitling the holder to a vary- 
ing quantity of gold bullion which would be the virtual dollar, 
i.e., to restore the ancient custom of seigniorage, but adjusted accord- 
ing to index numbers, 
i.e., to lower the mint-price of gold to keep pace with its actual depre- 
ciation. 



MONEY AND PRICES 479 

140. THE COMPENSATED DOLLAR: A CRITICISM' 

I 

It must be admitted at the outset that the plan, if carried out 
with iron consistency for a considerable stretch of time, would achieve 
the result mainly had in view — the prevention of a long-continued 
and considerable rise in prices. No one who holds to the doctrine 
that the general range of prices is determined by the relation between 
the quantity of commodities and the volume of the circulating 
medium, and that the volume of the circulating medium in the end 
depends, ceteris paribus, on the amount of coined money, can do 
otherwise than admit the logical soundness of the scheme. 

More stress should be laid, however, than Professor Fisher does, 
on the fact that the plan can work out its results only through its 
effects on the quantity of coined gold. The connection between the 
quant^'ty of coined money and general prices is by no means a close 
one. It is not only loose and uncertain, but we are much in the 
dark concerning the degree of looseness and uncertainty. Economists 
should be very chary of prediction in such matters, and Professor 
Fisher makes predictions which the event might greatly falsify. It 
seems to me highly improbable that fluctuations in prices would cease, 
or that such a smooth course would be followed as is indicated on 
Professor Fisher's chart. So long as the modern mechanism of credit 
continues to be used, fluctuations in prices seem to me inevitable. 
A long-continued considerable advance would alone be prevented. 
Commercial crises would not be prevented, nor, in my judgment, 
appreciably abated. Professor Fisher's predictions on this subject 
rest upon the particular theory of commercial crises which he has 
developed elsewhere. That theory does not seem to me established, 
and I have little faith in predictions that are based upon it. Nor 
do I believe that labor discontent is as closely connected with changes 
in general prices as Professor Fisher intimates. 

II 

What is to be said now of the possibility of securing the adoption 
of such a plan ? 

An international agreement for its adoption seems to me in the 
highest degree unlikely. Let it be recalled how repeated were the 
endeavors, under stress greater than that felt in recent years, to bring 

' Adapted from F. W. Taussig, "The Plan for a Compensated Dollar," in The 
Quarterly Journal of Economics, XXVII, 402-16 (May, 1913). 



48o MATERIALS FOR ELEMENTARY ECONOMICS 

about an agreement for international bimetallism. A fall in general 
prices and in money incomes is a phenomenon much more unwelcome 
than a rise. The earlier fall in prices, moreover, was bitterly felt 
not only by the debtor classes, but by all the protectionists. The 
movement for international bimetalHsm had powerful support in 
political circles as well as among the economists. Yet it never had a 
ghost of a chance. So great is the rivalry between nations, so intent 
is each upon its own advantage, so jealous are they of each other, so 
strong above all is the spirit of selfishness and mercantilism in their 
economic policies, that it seems to me hopeless to expect them to come 
to an understanding on a matter of this sort. 

Even if, by some unexpected stroke, an international agreement 
were to be secured, it would rest upon the frailest basis. Any war 
would put an end to it. Any stage of depression in an important 
country would render it in the highest degree irksome, would lead 
to its revocation by some one country, and then would cause the 
whole structure to topple over. Not least, there would be differences 
concerning the index number of prices to be used in fixing the seign- 
iorage. Prices do not move parallel in different countries. It is 
inevitable that they should sometimes rise in one country, while 
falling in another; or rise in one more than in another, or fall more. 
Which country's index number should govern ? If indeed aU coun- 
tries were convinced that a disastrous depreciation of money were 
impending, and if they were resolutely determined to sink all differ- 
ences and all selfish interests in order to prevent it, they might act 
on the basis of a compromise index number settled by an international 
commission. But the mere mention of these conditions precedent 
suffices to show how far they are from being present. 

The question arises whether it would be feasible for one country 
alone to adopt the plan.^ It would be feasible, in the same sense 
that it would be feasible for all countries together to adopt it. One 
country alone, carrying it out with unflinching consistency, might 
secure the desired result, subject to the qualifications which have 
already been indicated. But that any one country would in fact 
adopt it alone seems to me in the highest degree improbable. 

Consider for a moment the mode in which the scheme would work 
in detail if adopted by a single country. The immediate effect of a 

' Professor Fisher intimated in some of his earlier writings on the subject that 
a single country might adopt the plan. In later papers, however, he has advocated 
it for international adoption only. 



MONEY AND PRICES 481 

seigniorage would be, as Professor Fisher points out, a readjustment 
of the par of foreign exchange. The exporter would find the par of 
exchange lessened, and in terms of domestic money (compensated 
dollars) he would receive less than he got before. All commodities 
of export would fall in price at once, or fail to rise, to the extent of the 
seigniorage. The exporters would be as hotly indignant with the 
plan as if an excise tax had been imposed on their commodities without 
any possibility of their raising the price of their products. Consider 
for a moment what would be the state of mind in our cotton-export- 
ing South. Is it to be supposed that any set of legislators could resist 
the political pressure from the various exporting sections, and carry 
out the scheme unflinchingly ? Can we imagine a Congressman 
telling his constituents that they need only wait a while, until all 
money incomes and all prices had adjusted themselves to the new 
conditions? that then nobody would be worse off or better off than 
before ? To ask this sort of question is to answer it. 

Ill 

In view of all these complications, uncertainties, and political 
and sectional obstacles, the question presents itself whether the 
emergency is so serious, the evil so great, the gain to be secured so 
unmistakable, that it is worth while to press so far-reaching a change. 

Professor Fisher has predicted that prices will rise further. He 
is disposed to believe that there will be not only a rise, but that there 
will be a considerable rise. I hesitate very greatly to enter the domain 
of prediction. I am inclined to believe that the rise in prices will 
not cease for the next decade; but whether it will be considerable or 
moderate or negligible in extent, I should not venture to say. Pre- 
dictions concerning the output from the mines are to be taken with 
the greatest caution. We all recall the predictions which Suess made 
in 1892.' The distinguished geologist believed that the prospects 
of an increased production of gold were of the slightest, and that the 
world must fall back on the use of both metals. How different the 
course of events has been from that which he predicted! There are 
those who believe that the output of gold, so far from continuing to 
increase, has reached, or is approaching, its maximum.^ For myself, 
I should not be surprised if there were a cessation in growth, and 

' E. Suess, Die Zukunft des Silbers (1892). 

^ See, for example, R. A. Lehfeldt, in the Economic Journal, XXII, 487 (Sep- 
tember, 1912). 



482 MATERIALS FOR ELEMENTARY ECONOMICS 

should certainly be surprised if there were not a relaxation in the 
rate of growth. 

Further: it deserves to be borne in mind that the total supply 
of the precious metals is now so much greater than it was twenty 
years ago that the same annual increment will have much less effect 
on prices. This is the familiar consequence of the durability of the 
precious metals. 

Finally, a circumstance should be borne in mind which bears not 
only upon the intrinsic desirability of a regulative plan, but also upon 
the attitude of the general public and the consequent political and 
industrial possibilities. The economist is thinking and reasoning 
about the change which has been of special interest for him — the 
general rise in prices. The man on the street is thinking about the 
exceptional rise in the prices of one important set of commodities. 
Anyone who will examine with care the index numbers of our Bureau 
of Labor will see what a marked rise, much beyond that of the general 
index number, has appeared in the prices of farm products, and 
especially in the prices of meat. That special advance has taken 
place within the last three or four years. It is precisely within this 
period that general attention has been turned to rising prices. What 
the public has had chiefly in mind has been not the general change, 
but the particular change in the commodities of wide consumption. 
This, I believe, is the main cause of labor unrest. 

Whatever be the particular causes that have led to the high 
prices of food, economists agree that these causes will operate irre- 
spective of any compensated dollar plan. This would simply serve, 
at its best, to keep general prices where they are, leaving each particu- 
lar group of commodities subject to its own particular set of causes. 
If the compensated dollar plan were to be adopted, and if the prices 
of food should continue to mount, there would be disappointment 
for the general public, but nothing to surprise the economist. And 
conversely, it is entirely possible that the rise in the cost of living, 
that is, the special rise in the prices of food-stuffs, will reach its end 
irrespective of any monetary change whatever. The general rise in 
prices and money incomes, to repeat what has already been said, is 
not unwelcome to the great majority of people. Its incidental con- 
sequences are perceived and debated chiefly by the economists; 
such as the effects on the creditor class and the slowness of so-called 
fixed incomes to rise correspondingly. The general public is con- 
cerned chiefly with the conspicuous rise in the prices of food-stuffs, 



MONEY AND PRICES 483 

which is ascribable to causes very different from those that bring the 
general rise, and can be reached only by remedies very different. 

In sum, I am not convinced that the evils of the present system 
are so great as to call for the extraordinary remedy proposed. If, 
indeed, consequences of the most serious sort were imminent from an 
overwhelming increase in the gold supply, we might feel disposed to 
move heaven and earth to prevent them. Obstacles from inter- 
national jealousy, or from wide-spread misconceptions and fallacies, 
could then only spur us to greater exertions. But if the evils are as 
yet not unbearable; if those against which the public most rebels 
are due chiefly to other causes than the mere increase in gold supply; 
if the remedy proposed is one whose operation is far from certain, 
likely to lead to complications of its own, and in danger of being 
discarded on its first failure to work a cure — let us bear the ills we have. 

141. METHODS OF REGULATING A PAPER CURRENCY' 

The state may either take the issue of representative money into 
its own hands, as it takes the coining of money, or it may allow 
private individuals, or semi-public companies and corporations, to 
undertake the work under more or less strict legislative control. In 
either case we may lay down the following series of methods according 
to which the amount of issue may be regulated, and the performance 
of the promises guaranteed. 

1. The simple deposit method. — ^The issuer of promissory notes 
may be obliged to keep a stock of coin and bullion constantly on hand, 
equal in amount to the aggregate of the uncanceled notes, each of 
which, being instantly paid on presentation, will produce a corre- 
sponding decrease of the reserve. 

2. The partial deposit method. — Instead of being obliged to keep 
the whole of the precious metals deposited in his vaults, the issuer 
may be allowed to invest a fixed amount in government funds, or 
other safe profitable securities. 

3. The minimum reserve method. — The issuer may be bound to have 
on hand under all circumstances a fixed minimum amount of coin and 
bullion. 

4. The proportional reserve method. — The reserve may be made to 
vary with the amount of outstanding notes, being, say, at least one- 
third or one-fourth of the total. 

' From W. S. Jevons, Money and the Mechanism of Exchange, chap, xviii. 



484 MATERIALS FOR ELEMENTARY ECONOMICS 

5. The maximum issue method. — Permission may be given to issue 
notes not exceeding in the aggregate a fixed amount, prohibitory 
penalties being imposed upon any breach of this restriction. 

6. The elastic limit method. — ^A limit may be assigned to the 
aggregate amount of notes, as in the last method, but the penalties on 
the excessive issue may be intentionally made so light, that the issuer 
will imder some circumstances prefer to pay the penalty rather than 
restrict his issues. 

7. The documentary reserve method. — The reserve of property which 
the issuer is required to keep may consist not of gold or silver coin or 
bullion, but of government funds, bonds, shares, or other documentary 
securities. 

8. The real property reserve method. — Instead of merely documen- 
tary property, the issuer may be allowed to treat various property, 
such as land, houses, ships, railway shares, etc., as his reserve of wealth 
to meet engagements. 

9. The foreign exchanges method. — Some important bank may be 
allowed to issue convertible notes on the understanding that it will 
not increase the amount in circulation so long as the foreign exchanges 
are against the country, and render the export of specie profitable. 

10. The free issue method. — ^The business of issuing promissory 
notes may be left open to the free competition of all individuals, free 
from any restrictions or conditions, except such laws as apply to all 
commercial contracts and promises. 

11. The gold par method. — Paper money may be issued, bearing 
the appearance of promissory notes, but inconvertible into coin. The 
issue being restricted as long as any premium on gold is apparent, the 
paper money may be thus maintained equal in value to the coin 
which it nominally represents. 

12. The revenue payments method. — Inconvertible paper money 
may be freely issued, but an attempt may be made to keep up its 
value by receiving it in place of coin in the payment of taxes. 

13. The deferred convertibility method. — Notes may be issued 
promising to pay metallic money at some future day, either definitely 
fixed or dependent upon political or other contingent events. 

14. The paper money method. — Lastly, those who coin apparent 
promissory notes may be entirely absolved from the performance of 
their promises, so that the notes circulate by force of habit, by the 
command of the sovereign, or in consequence of the absence of any 
other medium of exchange. 



MONEY AND PRICES 485 

Although I have, in the above statement, enumerated no less than 
fourteen distinct methods of managing the issue of paper currency, 
it is by no means certain that other methods have not been employed 
from time to time. There may be, in fact, an almost unlimited 
number of devices for securing the performance of promises, or for 
rendering the performance unnecessary. Moreover, these methods 
may be combined together in almost unlimited variety. The reserve 
may be required to be partially in the form of specie, and partially in 
documentary securities, or real property. A banker may be allowed 
to issue a certain fixed amount of notes without any condition as to 
reserves, and to issue further notes on the deposit method. 

142. PAPER MONEY: THE CONTINENTAL CURRENCY' 

The depreciation began at different periods in different states; 
but in general about the middle of the year 1777, and progressively 
increased for three or four years. Toward the last of 1777, the 
depreciation was about two or three for one; in 1778 it advanced 
from two or three for one to five or six for one; in 1779, from five 
or six for one to 27 or 28 for one; in 1780 from 27 or 28 for one to 50 
or 60 for one, in the first four or five months. Its circulation was after- 
ward partial, but where it passed it soon depreciated to 150 for one. 
In some few parts it continued in circulation for the first four or five 
months of 1781, but in this latter period many would not take it at 
any rate, and they who did, received it at a depreciation of several 
hundreds for one. 

As there was a general clamor on account of the floods of money, 
which at successive periods had deluged the states, it was resolved 
in October, 1779, that no further sum should be issued on any account 
whatever than what, when added to the present sum in circulation, 
would in the whole be equal to 200 millions of dollars. It was at 
the same time resolved, that Congress should emit only such a part 
of the sum wanting to make up 200 millions, as should be absolutely 
necessary for the public exigencies, before adequate supplies could 
be otherwise obtained, relying for such supplies on the exertions of 
the several states. This was forcibly represented in a circular letter 
from Congress to their constituents, and the states were earnestly 
intreated to prevent that deluge of evils which would flow from 
their neglecting to furnish adequate supplies for the wants of the con- 

' From David Ramsay, History of the American Revolution (1789), II, 128-36. 



486 MATERIALS FOR ELEMENTARY ECONOMICS 

f ederacy. The same circular letter stated the practicability of redeem- 
ing all the bills of Congress at par with gold and silver, and rejected 
with indignation the supposition that the states would ever tarnish 
their credit by violating public faith. These strong declarations in 
favor of the paper currency deceived many to repose confidence in it 
to their ruin. Subsequent events compelled Congress to adopt the 
very measure in 1780, which in the preceding year they had sincerely 
reprobated. 

From the non-compliance of the states, Congress was obliged in a 
short time after the date of their circular letter to issue such a further 
quantity as when added to previous emissions made the sum of 200 
millions of dollars. Besides this immense sum, the paper emissions of 
the different states amounted to many millions; which mixed with 
the continental money, and added to its depreciation. What was 
of little value before now became of less. The whole was soon 
expended, and yet from its increased depreciation the immediate 
wants of the army were not supplied. The source which for five 
years had enabled Congress to keep an army in the field being 
exhausted, General Washington was reduced for some time to the 
alternative of disbanding his troops, or of supplying them by a mili- 
tary force. He preferred the latter, and the inhabitants of New 
York and New Jersey, though theyfelt the injury, saw the necessity, 
and patiently submitted. 

The states were next called upon to furnish in lieu of money 
determinate quantities of beef, pork, flour, and other articles, for the 
use of the army. This was called a requisition for specific supplies 
or a tax in kind, and was found on experiment to be so difficult of 
execution, so inconvenient, partial, and expensive, that it was speedily 
abandoned. About this time. Congress resolved upon another 
expedient. This was to issue a new species of paper money, under 
the guaranty of the several states. The old money was to be called 
in by taxes, and as soon as brought in to be burnt, and in lieu thereof, 
one dollar of the new was to be emitted for every twenty of the old, 
so that when the whole 200 millions were drawn in and canceled, only 
ten millions of the new should be issued in their place, four-tenths of 
which were to be subject to the order of Congress, and the remaining 
six-tenths to the order of the several states. These new bills were to 
be redeemable in specie within six years, and to bear an interest at 
the rate of five per cent to be paid also in specie, at the redemption of 
the bills, or at the election of the owner annually in bills of exchange 



MONEY AND PRICES 487 

on the American commissioners in Europe, at four shillings and six 
pence for each dollar. 

From the execution of these resolutions it was expected, that the 
old money would be canceled, that the currency would be reduced 
to a fixed standard, that the states would be supplied with the means 
of purchasing the specific supplies required of them, and that Congress 
would be furnished with efficient money, to provide for the exigencies 
of the war. That these good effects would have followed, even though 
the resolutions of Congress had been carried into execution, is very 
questionable, but from the partial compliances of the states the 
experiment was never fairly made, and the new paper answered very 
little purpose. It was hoped by varying the ground of credit, that 
Congress would gain a repetition of the advantages which resulted 
from their first paper expedient, but these hopes were of short duration. 
By this time much of the popular enthusiasm had spent itself, and 
confidence in public engagements was nearly expired. The event 
proved that credit is of too delicate a nature to be sported with, and 
can only be maintained by honesty and punctuality. The several 
expedients proposed by Congress for raising supplies having failed, a 
crisis followed very interesting to the success of the revolution. The 
particulars of this shall be related among the public events of the year 
1 78 1, in which it took place. Some observations on that primary 
instrument of American Independence, the old continental bills of 
credit, shall for the present close this subject. 

Paper of no intrinsic value was made to answer all the purposes 
of gold and silver, and to support the expenses of five campaigns. 
This was in some degree owing to a previous confidence, which had 
been begotten by honesty and fidelity, in discharging the engage- 
ments of government. From New York to Georgia there never had 
been, in matters relating to money, an instance of a breach of public 
faith. In the scarcity of gold and silver, many emergencies had 
imposed a necessity of emitting bills of credit. These had been uni- 
formly and honestly redeemed. The bills of Congress being thrown 
into circulation, on this favorable foundation of public confidence, 
were readily received. The enthusiasm of the people contributed to 
the same effect. That the endangered liberties of America ought to be 
defended, and that the credit of their paper was essentially necessary 
to a proper defense, were opinions engraven on the hearts of a great 
majority of the citizens. It was therefore a point of honor, and con- 
sidered as a part of duty, to take the bills freely at their full value. 



488 MATERIALS FOR ELEMENTARY ECONOMICS 

Private gain was then so little regarded, that the Whig citizens were 
willing to run all the hazards incidental to bills of credit, rather than 
injure the cause of their country by undervaluing its money. Every- 
thing human has its limits. While the credit of the money was 
well supported by public confidence and patriotism, its value dimin- 
ished, from the increase of its quantity. Repeated emissions begat 
that natural depreciation, which results from an excess of quantity. 
This was helped on by various causes, which affected the credit of 
the money. The enemy very ingeniously counterfeited their bills, 
and industriously circulated their forgeries through the United 
States. Congress allowed to their public agents a commission on the 
amount of their purchases. Instead of exerting themselves to pur- 
chase at a low price, they had therefore an interest in giving a high 
price for every thing. So strong was the force of prejudice, that the 
British mode of supplying armies by contract, could not for a long 
time obtain the approbation of Congress. While these causes 
operated confidence in the public was abating, and at the same time, 
that fervor of patriotism which disregarded interest was daily declin- 
ing. To prevent or retard the depreciation of their paper money. 
Congress attempted to prop its credit by means which wrecked private 
property, and injured the morals of the people without answering the 
end proposed. They recommended to the states to pass laws for 
regulating the prices of labor, manufacture, and all sorts of com- 
modities, and for confiscating and selHng the estates of Tories, and 
for investing the money arising from the sales thereof in loan-ofiice 
certificates. As many of those who were disaffected to the revolution 
absolutely refused to take the bills of Congress even in the first stage 
of the war, when the real and nominal value was the same, with the 
view of counteracting their machinations. Congress early recom- 
mended to the states to pass laws for making the paper money a legal 
tender, at their nominal value in the discharge of bona fide debts, 
though contracted to be paid in gold and silver. With the same views, 
they further recommended that laws should be passed by each of the 
states, ordaining that "whosoever should ask or receive more, in their 
bills of credit for gold or silver or any species of money whatsoever, 
than the nominal sum thereof in Spanish dollars, or more in the said 
bills for any commodities whatsoever, than the same could be pur- 
chased from the same person in gold and silver, or offer to sell any 
commodities for gold and silver, and refuse to sell the same for the said 
bills, shall be deemed an enemy to the liberties of the United States, 



MONEY AND PRICES 489 

and forfeit the property so sold or offered for sale." The laws which 
were passed by the states, for regulating the prices of labor and com- 
modities, were found on experiment to be visionary and impracticable. 
They only operated on the patriotic few, who were disposed to sacrifice 
every thing in the cause of their country, and who implicitly obeyed 
every mandate of their rulers. Others disregarded them, and either 
refused to part with their commodities, or demanded and obtained 
their own prices. 

These laws in the first instance made an artificial scarcity, and 
had they not been repealed would soon have made a real one, for men 
never exert themselves unless they have the fruit of their exertions 
secured to them, and at their own disposal. 

The confiscation and sale of the property of Tories, for the most 
part brought very little into the public treasury. The sales were 
generally made for credit and by the progressive depreciation, what 
was dear at the time of the purchase, was very cheap at the time of 
payment. The most extensive mischief resulted, in the progress and 
toward the close of the war, from the operation of the laws which 
made the paper bills a tender in the discharge of debts contracted 
payable in gold or silver. When this measure was first adopted 
little or no injustice resulted from it, for at that time the paper bills 
were equal, or nearly equal to gold or silver, of the same nominal sum. 
In the progress of the war, when depreciation took place, the case was 
materially altered. Laws which were originally innocent became 
eventually the occasion of much injustice. 

The aged who had retired from the scenes of active business, to 
enjoy the fruits of their industry, found their substance melting away 
to a mere pittance, insufficient for their support. The widow who 
lived comfortably on the bequests of a deceased husband experienced a 
frustration of all his well-meant tenderness. The laws of the country 
interposed, and compelled her to receive a shilling, where a pound 
was her due. The blooming virgin who had grown up with an 
unquestionable title to a liberal patrimony was legally stripped of 
everything but her personal charms and virtues. The hapless orphan, 
instead of receiving from the hands of an executor a competency to set 
out in business, was obliged to give a final discharge on the payment 
of dd. in the pound. In many instances, the earnings of a long life 
of care and diligence were, in the space of a few years, reduced to a 
trifling sum. A few persons escaped these affecting calamities "by 
secretly transferring their bonds, or by flying from the presence or 



490 MATERIALS FOR ELEMENTARY ECONOMICS 

neighborhood of their debtors. The evils which resulted from the 
legal tender of these paper bills were foreign from the intentions of 
Congress, and of the state legislatures. It is but justice to add 
further that a great proportion of them flowed from ignorance. 
Till the year 1780, when the bills fell to forty for one, it was designed 
by most of the rulers of America, and believed by a great majority 
of the people, that the whole sum in circulation would be appreciated 
by a reduction of its quantity, so as finally to be equal to gold or silver. 
In every department of government the Americans erred from ignor- 
ance, but in none so much as in that which related to money. 

Such were the evils which resulted from paper money. On the 
other hand, it was the occasion of good to many. It was at all times 
the poor man's friend. While it was current, all kinds of labor very 
readily found their reward. In the first years of the war, none were 
idle from want of employment, and none were employed, without 
having it in their power to obtain ready payment for their services. 
To that class of people, whose daily labor was their support, the 
depreciation was no disadvantage. Expending their money as fast 
as they received it, they always got its full value. The reverse was 
the case with the rich, or those who were disposed to hoarding. No 
agrarian law ever had a more extensive operation than Continental 
money. That for which the Gracchi lost their lives in Rome, was 
peaceably effected in the United States by the legal tender of these 
depreciating bills. The poor became rich, and the rich became poor. 
Money-lenders, and they whose circumstances enabled them to 
give credit, were essentially injured. All that the money lost in its 
value was so much taken from their capital, but the active and 
industrious indemnified themselves, by conforming the price of their 
services to the present state of the depreciation. The experience of 
this time inculcated on youth two salutary lessons, the impolicy of 
depending on paternal acquisitions, and the necessity of their own 
exertions. They who were in debt, and possessed property of any 
kind, could easily make the latter extinguish the former. Every- 
thing that was useful when brought to market readily found a pur- 
chaser. A hog or two would pay for a slave; a few cattle for a com- 
fortable house ; and a good horse for an improved plantation. A small 
part of the productions of a farm would discharge the long-outstand- 
ing accounts due from its owner. The dreams of the golden age 
were realized to the poor man and the debtor, but unfortunately what 
these gained was just so much taken from others. 



MONEY AND PRICES 491 

The evils of depreciation did not terminate with the war. They 
extend to the present hour. That the helpless part of the community 
were legislatively deprived of their property was among the lesser 
evils which resulted from the legal tender of the depreciated bills of 
credit. The iniquity of the laws estranged the minds of many of 
the citizens from the habits and love of justice. 

The nature of obligations was so far changed that he was reckoned 
the honest man who from principle delayed to pay his debts. The 
mounds which government had erected, to secure the observance of 
honesty in the commercial intercourse of man with man, were broken 
down. Truth, honor, and justice were swept away by the overflowing 
deluge of legal iniquity, nor have they yet assumed their ancient 
and accustomed seats. Time and industry have already, in a great 
degree, repaired the losses of property, which the citizens sustained 
during the war, but both have hitherto failed in effacing the taint 
which was then communicated to their principles, nor can its total 
ablution be expected till a new generation arises, unpracticed in the 
iniquities of their fathers. 



492 



MATERIALS FOR ELEMENTARY ECONOMICS 



143. DEPRECIATION OF THE CONTINENTAL CURRENCY' 

Jefferson's Table of Emissions 



Emissions 



1775, June 23 
Nov. 29 

1776, Feb. 17 
Aug. 13 

1777, May 20 
Aug. IS 
Nov. 7 
Dec. 3 

1778, Jan. 8 
Jan. 2 2 
Feb. 16 
Mar. 5 
April 4 
April 1 1 
April 18 
May 22 
June 20 
July 30 
Sept. 5 
Sept. 26 
Nov. 4 
Dec. 14 

1779, Jan. 14 
Feb. 3 
Feb. 12 
April 2 
May 5 
June 4 
June 17 
Sept. 17 
Oct. 14 
Nov. 17 
Nov. 29 



Sum Emitted 



$2,000,000 

3,000,000 

4,000,000 

5,000,000 

5,000,000 

1 ,000,000 

1,000,000 

1,000,000 

1,000,000 

2,000,000 

2,000,000 

2,000,000 

1 ,000,000 

5,000,000 

500,000 

5,000,000 

5,000,000 

5 ,000,000 

5,000,000 

10,000,100 

10,000,100 

10,000,100 

24,447,620* 

5,000,160 

5,000,160 

5,000,160 

10,000,100 

I0,000,T00 

15,000,280 
15,000,260 
5,000,180 
10,050,540 
10,000,140 



$200,000,000 



Depreciation 



2, 2,3 

3 

4 

4 

4 

4 

5 

5 

6 

6 

6 

5 

4 

4l 

5 

5 

6 

6 

8 
10 
10 

17 

24 

20 

20 

24 

30 

38i 

3«i 



Worth of the Sum 

Emitted in Silver 

Dollars 



152,000,000 
3 ,000,000 
4,000,000 
5,000,000 
1,877,273 

333,333i 
250,000 
250,000 
250,000 
500,000 
400,000 
400,000 
i66,666| 
833,333! 
8--',333l 
1,000,000 
1,250,000 
i,i].i,iii 
1 ,000,000 



2,000, 
1,666: 
1,666, 
3,055, 

5°°: 
500, 

294; 

416, 
500. 

750; 
625. 
166, 

261. 

259: 



,020 

683I 
683! 

9S2| 

016 

016 

,127 

670! 
005 

,014 
oiof 

,6721 

053 

743 



$36,367,719! 



* The sum actually voted was $50,000,400, but part of it was for exchange of old bills, without 
saying how much. It is presumed that these exchanges absorbed $25,552,780, because $24,447,620 
with all the other emissions preceding September 2, 1779, will amount to $159,948,880, the sum which 
Congress declared to be then in circulation. 



^ From Henry Phillips, Historical Sketches of American Paper Currency, Second 
Series (1866), p. 199. 



MONEY AND PRICES 



493 



144. GREENBACK PRICES DURING THE CIVIL WAR' 
I860 1861 1862 1863 1864 1865 



iUHHtisnunsHtisUHsiikmui-iiHUUiniii^Uit 


iiia Ai-s 


<E-?4'. <Ja«i5 












\\ 


























f. 






















r •' 


- A \ 












__ __ 


1 .. . '**, h I. 












% ■ 












1 "' "' *" "^ ' 












' 


V V 
























■ / 


' H 


'• 




















1 ' 

'A 


]\ 


\ 






i 


t 










,■ 


1 




\ 


'J 














1 




/ 




\ 






1 


\ 




,. 


' 


y 


^> 


/ 


^1 


\ 


^ 


^ 










\ 




/ 
















^^.KXj 


/ 












\ 




' 


> 


'"■ 


1 j/ t . 










J 




V 






































































































J 





Relative Prices at Wholesale and the Value of Gold Coin in 
Currency, 1860-65 



145. DEPRECIATED PAPER MONEY IN THE CONFEDERACY^ 

The financial system adopted by the Confederate government 
was singularly simple and free from technicalities. It consisted 
chiefly in the issue of treasury notes enough to meet all the expenses 
of the government, and in the present advanced state of the art of 
printing there was but one difficulty incident to this process; namely, 
the impossibility of having the notes signed in the Treasury Depart- 

' From W. C. Mitchell, A History of the Greenbacks, p. 277. University of 
Chicago Press, 1903. 

^ Adapted from G. C. Eggleston, A Rebel's RecoUcclions, pp. 78-93. Hurd & 
Houghton, 1875. 



494 MATERIALS FOR ELEMENTARY ECONOMICS 

ment, as fast as they were needed. There happened, however, to 
be several thousand young ladies in Richmond willing to accept light 
and remunerative employment at their homes, and as it was really a 
matter of small moment whose name the notes bore, they were given 
out in sheets to these young ladies, who signed and returned them for a 
consideration. I shall not undertake to guess how many Confederate 
treasury notes were issued. Indeed, I am credibly informed by a 
gentleman who was high in ofifice in the Treasury Department, that 
even the secretary himself did not certainly know. The acts of Con- 
gress authorizing issues of currency were the hastily formulated 
thought of a not very wise body of men, and my informant tells me 
that they were frequently susceptible of widely different construction 
by different ofhcials, However that may be, it was clearly out of 
the power of the government ever to redeem the notes, and whatever 
may have been the state of affairs within the treasury, nobody outside 
its precincts ever cared to muddle his head in an attempt to get at 
exact figures. 

We knew only that money was astonishingly abundant. Provi- 
sions fell short sometimes, and the supply of clothing was not always 
as large as we should have liked, but nobody found it difficult to get 
money enough. It was to be had almost for the asking. 

Money was so easily got, and its value was so utterly uncertain, 
that we were never able to determine what was a fair price for any- 
thing. We fell into the habit of paying whatever was asked, knowing 
that tomorrow we should have to pay more. Speculation becam.e 
the easiest and surest thing imaginable. The speculator saw no 
risks of loss. Every article of merchandise rose in value every day, 
and to buy anything this week and sell it next was to make an enor- 
mous profit quite as a matter of course. 

Naturally enough, speculation soon fell into very bad repute, and 
the epithet "speculator" came to be considered the most opprobrious 
in the whole vocabulary of invective. The feeling was universal 
that the speculators were fattening upon the necessities of the country 
and the sufferings of the people. Nearly all mercantile business 
was regarded at least with suspicion, and much of it fell into the hands 
of people with no reputations to lose, a fact which certainly did not 
tend to relieve the community in the matter of high prices. 

The prices which obtained were almost fabulous, and singularly 
enough there seemed to be no sort of ratio existing between the values 
of different articles. I bought coffee at forty dollars and tea at 



MONEY AND PRICES 495 

thirty dollars a pound on the same day. My dinner at a hotel cost 
me twenty dollars, while five dollars gained me a seat in the dress 
circle of the theater. I paid one dollar the next morning for a copy 
of the Examiner, but I might have got the Whig, Dispatch, Enquirer, 
or Sentinel for half that sum. For some wretched tallow candles I 
paid ten dollars a pound. The utter absence of proportion between 
these several prices is apparent, and I know of no way of explaining 
it except upon the theory that the unstable character of the money 
had superinduced a reckless disregard of all value on the part of 
both buyers and sellers. A facetious friend used to say prices were 
so high that nobody could see them, and that they "got mixed for 
want of supervision." He held, however, that the difference be- 
tween the old and the new order of things was a trifling one. 
"Before the war," he said, "I went to market with the money in 
my pocket, and brought back my purchases in a basket; now I take 
the money in the basket, and bring the things home in my pocket." 

I am sometimes asked at what time prices attained their highest 
point in the Confederacy, and I find that memory fails to answer the 
question satisfactorily. They were about as high as they could be 
in the fall of 1863, and I should be disposed to fix upon that as the 
time when the climax was reached, but for my consciousness that the 
law of constant appreciation was a fixed one throughout the war. 
The financial condition got steadily worse to the end. I believe the 
highest price, relatively, I ever saw paid, was for a pair of boots. A 
cavalry officer, entering the little country store, found there one pair 
of boots which fitted him. He inquired the price. "Two hundred 
dollars," said the merchant. A five hundred dollar bill was offered, 
but the merchant, having no smaller bills, could not change it. 
"Never mind," said the cavalier, "I'll take the boots anyhow. Keep 
the change; I never let a little matter of three hundred dollars stand 
in the way of a trade." 

That was on the day before Lee's surrender, but it would not have 
been an impossible occurrence at any time during the preceding 
year. The money was of so little value that we parted with it gladly 
whenever it would purchase anything at all desirable. I cheerfully 
paid five dollars for a little salt, at Petersburg, in August, 1864, and 
being thirsty drank my last two dollars in a half-pint of cider. 

The government's course in levying a tax in kind, as the only 
possible way of making the taxation amount to anything, led speedily 
to the adoption of a similar plan, as far as possible, by the people. A 



496 MATERIALS FOR ELEMENTARY ECONOMICS 

physician would order from his planter friend ten or twenty visits' 
worth of corn, and the transaction was a perfectly intelligible one to 
both. The visits would be counted at ante-war rates, and the corn 
estimated by the same standard. 

146. DEPRECIATED MONEY AND WAGE-EARNERS: THE 
STRIKE AT IQUIQUE' 

Iquique is a port of Northern Chile on the Pacific Ocean, with a 
population of about 40,000. The city is built at the water's edge on 
a low, flat area directly under high, yellow, sand bluffs. Above the 
bluffs are the pampas, which stretch back in arid wastes into the 
interior. On these elevated plains are to be found the deposits of 
minerals and nitrate which have been the basis of the Chilean income 
since the recent war with Peru. The nitrate officinas are supplied 
with laborers mainly drawn from among the natives, or so-called rotos. 
These men have many good qualities, and are loyal and industrious 
when well treated; but the exploitation of the roto by the employing 
class is unfortunately not rare. In many instances the laborer is a 
peon, practically attached to the soil; because, by law, he cannot 
migrate while he is in debt to his employer and the latter is easily 
able to make the condition of being indebted practically permanent. 

The facts as to the strike at Iquique in December, 1907, were care- 
fully concealed from the outside world by official censorship ; but its 
bloody outcome was an illustration, which should not go unrecorded, 
of the influence of a bad monetary system upon the labor question. 
In Chile, before the war with Peru and Bolivia in 1879, the paper 
money was convertible into gold at 48^. per peso. Later, the paper 
fell to about 36^/. In recent years, it went to iM., largely because the 
government confused the fiscal with the monetary functions of the 
treasury, and borrowed under the form of large issues of paper money. 
About 1904, the country was caught in a wild whirl of speculation and 
over-expansion, which came to an end with the frightful earthquake of 
1906, especially destructive at Valparaiso. Then the paper subse- 
quently fell as low as "jd. or 2>d. The proposals of redemption force- 
fully urged upon Congress by President Montt, looking to a restora- 
tion of the rate to perhaps 18J., have been strongly opposed by those 
who monopolize the agricultural properties, as well as by employers, 

' From J. Laurence Laughlin, "The Strike at Iquique," Journal of Political 
Economy, XVII, 641-43 (November, 1909). 



MONEY AND PRICES 497 

such as the producers of nitrate. Nitrate is sold abroad for gold ; and 
the prices in the world's markets have been falling in recent years. 
Anything, therefore, which would increase their expenses would be 
vigorously opposed when their returns were being reduced. For this 
reason they were opposed to any rise of wages. Wages, however, 
were paid in paper money; and a customary number of pesos per day 
were always expected by the untutored rotos, without much regard to 
what the paper would buy. The nitrate qfficinas, with the gold 
obtained from their product, could obviously get more pesos in paper 
money at the rate of M. or 1 2d. than at iM. That is, as the rate went 
up, their labor cost them more relatively to the price of nitrate in gold. 

The laborer, on the other hand, was the victim, as always, of a 
depreciating standard. As the paper money fell in value, the 
importers and sellers of staple articles raised their prices. Thus, 
without an understanding of the monetary principles at work, the poor 
roto saw only that his customary wages in paper bought for him less 
food and satisfactions. He was, in truth, the sufferer from a vicious 
monetary system, kept in existence for the selfish gain of the classes 
who had the majority in Congress and who indefinitely postponed the 
resumption scheme of President Montt. The roto, however, has a 
quick and fiery temper, and when angered he stops at nothing. This 
natural turning against injustice brought on the pitiful tragedy at 
Iquique. The roto flew in the face of law and order; and by the 
irony of fate saw the force which had brought on his misery also 
engaged in crushing him under a heel of iron. 

The first hint of impending danger came from the Chinese, who 
always have their ears to the ground; but their fears were scouted. 
Then one morning, suddenly, 20,000 strikers from the officinas on the 
arid pampas came pouring over the yellow sand bluffs down into 
Iquique, and took possession of the city. Houses were barricaded, 
and the city was left in the hands of a cruel mob. There were no 
troops on hand to cope with the situation. As subsequent events 
showed, the leading citizens were marked for death, and the city was 
to be fired simultaneously in many different places. At this critical 
moment soldiers were hurriedly despatched by steamer to Iquique, led 
by an officer of determination — and Chilean soldiers are good fighters. 
The rioters were maneuvered into a city square where they were 
massed about a church. Ineffectual efforts were made to induce them 
to disperse. Instead the leaders of the mob only responded by more 
fiery speeches. The military sent word that they would fire at 4 



498 MATERIALS FOR ELEMENTARY ECONOMICS 

o'clock, if the rioters had not then dispersed. This was received with 
derisive cheers, when 4 o'clock came and no shot was fired. The 
officer then took out his watch and gave them five minutes in which to 
withdraw. At five minutes past four the whir of the mitrailleuse 
began. Piles of dead and dying were heaped up in a moment. Two 
hundred were killed and three hundred wounded; and the rest fled up 
the sand bluffs and were lost to sight on the pampas. Thus the 
innocent victims of a wrongful monetary system were led to their own 
destruction by a perfectly natural revolt against injustice; and 
another crime was laid at the door of a fluctuating standard of prices. 



XI. CREDIT AND BANKING 

147. CREDIT INSTRUMENTS 

A promissory note is an unconditional written promise by X (the 
maker) agreeing to pay, either on demand or at a definite future date, 
a sum of money to Y (the payee) or- to F's order or to bearer. It 
may or may not designate the place at which payment is to be made. 
Promissory notes may be issued by institutions and governments as 
well as by individuals. Bank notes, United States notes, certificates 
of deposit, etc., are forms of the promissory note. 

A PROMISSORY NOTE 



I500.00 Chicago, January 11, 1910 

Six months after date I promise to pay to the order of Y five hundred 
dollars with interest at 4 per cent. Value received. 

X 



A bill of exchange is an unconditional written order, signed by X 
(the person giving the order — the drawer) ordering Z (the drawee) 
to pay, either on demand or at a definite future date, a sum of money 
to Y (the payee) or to F's order or to bearer. The drawee may 
indicate his willingness to honor it by signing his name to the word 
"accepted" written across the face of the bill. 

Banker's bills, banker's drafts, banker's exchange, or cashier's 
checks are bills drawn by one banker and payable by another. Com- 
mercial bills are those growing out of some commercial transaction, 
such as a sale of goods. 

A BILL or EXCHANGE 



Chicago, January 10, igii 

to the orde 
) the accou 

To Z, New York City 



At sixty days' sight pay to the order of F five hundred dollars. 
Value received. Charge to the account of 



In order to illustrate the use of these instruments, suppose that X 
has bought a bill of goods from F. X may pay in one of several ways : 

499 



500 MATERIALS FOR ELEMENTARY ECONOMICS 

(i) He may "pay cash" and this might be in bank notes, United 
States notes, gold certificates, etc. (2) He may give Y a check on 
his (X's) bank, (3) He may draw and deliver a bill of exchange on 
Z payable to Y or to F's order. In such a case Z was presumably a 
debtor to X. (4) He may give Y a promissory note. This will merely 
defer actual payment. (5) He may "accept" a bill of exchange 
which Y has drawn upon him, (6) He may transfer to Y some check 
or promissory note or bill of exchange which some other person (say, V) 
has drawn to X's order or to bearer. (7) He may buy from his banker 
a banker's draft or cashier's check drawn (on some other banker) in 
favor of Y. X may make this purchase by check or otherwise. 

If X is in New York and Y is in London the payment is likely to 
take place in one of the following ways: (i) X may buy from his 
banker a (banker's) bill of exchange drawn on some London bank. 
He will send tliis to Y who will collect from the London bank; (2) 
if Z, in London, owes X, X may draw a bill of exchange on Z in favor 
of Y. He will send this to Y who will collect from Z. (3) Some other 
person, V, in New York, may have a debtor, W, in London. V may 
draw on W, payable to T or to bearer, and then the bill may be sold 
in the open market. X may buy this in the market, indorse it to 
the order of Y, send it to Y who will collect from W. 

148. THE USE OF CREDIT INSTRUMENTS^ 

I . The volume of business that can be done by credit paper depends 
on several circumstances. Obviously, in the first place, it depends 
upon the banking facilities of the country. If the banks are widely 
distributed, if they are willing to deal in transactions small enough 
to be within the reach of large numbers of people, many more trans- 
actions will be settled through them than would otherwise be the case. 
This fact undoubtedly explains in large measure the development 
of what may be called the "banking habit" among the people of the 
United States. Undoubtedly our people pay by check much more 
commonly and much more largely than people of any other country. 

In the next place, the density of population is, of course, an impor- 
tant factor in the growth of credit exchanges. A larger volume of 
business is settled by bank paper in a commercial center than in an 
agricultural community, even though the proportion of total business 
thus settled may not be larger. 

^ Adapted from David Kinley, Use of Credit Instruments in Payments in the 
United States, passim. National Monetary Commission, 1910. 



CREDIT AND BANKING 



SOI 



Finally, the general education and intelligence of the mass of the 
people is an important factor. Men do not use banks unless they have 
confidence in them, and they have come to be regarded as a settled 
part of the ordinary commercial mechanism of the community. 

2. It is very clear that a large proportion of the business of the 
country, even in the retail trade, is done by means of credit instru- 
ments. We are justified in concluding that 50 or 60 per cent of the 
retail trade of the country is settled in this way. Over 90 per cent 





DIAGRAM 
10 so 


OF THE PERCENTAGE OF OHEOKS IN RETAIL DEPOSITS BY CLASSES OF BANKS. 

« *o M 40 7o aa o» 










































^ 




















































Uuf'd MTiDH b(Bk> 












1 




T I 






























DIAGRAM or THE PEBCENTAGE OF C 
/O 50 3C Ifi i7 


lECKS IN RETAIl DEPOSITS 

> y m Ko ffl 








































—^ 




























































1 


















DIAGRAM or 
/J it I 


THX PEEOrh 


TiOE or CHIOKS IN WHOLESALE': DEPOSITS 
p fc t} It. *0 ». 




Si b k 






















Privale banks 






















Lwaa and trust com- 










































































































DIAGRAM or THE PERCENTAGE OF CHXCK3 I 

C 10 30 VO 


i AOOKIOATE DEPOSITS BY CLASSES OF BANKS. 

a LO 73 iO -JO 


- 
























SlMbuki. 


















.- 

































of the wholesale trade of the country is done with checks and other 
credit documents. We may therefore safely accept an average of 
80 to 85 per cent as the probable percentage of business of this country 
transacted by check. 

3. The amount of money released by our credit transactions is 
not equal in amount to the volume of credit instruments, for there 
must always be enough to settle the uncanceled balances called for 
in money from day to day. The amount of money displaced is the 



502 MATERIALS FOR ELEMENTARY ECONOMICS 

difference between the amount that would be needed in a purely 
money regime and the amount needed to pay the uncanceled balances 
of the credit transactions. It is important to note that an increase 
in the volume of credit transactions does not necessarily mean that 
we must get a proportionate increase in our reserve of money. Every 
refinement of the credit mechanism makes it possible to do a larger 
volume of business on the same reserve. 

No one can say, therefore, with definiteness what is the amount of 
money released if 75 or 80 per cent of our business transactions are 
settled by means of credit paper. This is a matter in which the long 
experience of practical bankers is the only safe guide, because the 
amount in question is changing from day to day as the conditions 
change. No simple rule about it can be laid down. Certainly, 
however, it is not 75 per cent of the money which would be necessary 
if all transactions were settled with money. It is an amount varjdng 
from one-third to one-fifth of uncanceled credit balances, according 
to the perfection of the banking machinery, the state of credit, pros- 
perity, and public confidence. 

4. This demand for reserve has an influence in determining the 
value of money, just as has the demand for money for direct pay- 
ment. 

5. The fact that so large a proportion of business is done with 
credit paper may or may not be a good thing. Whether it is or not 
depends on circumstances. If any part of the country is compelled 
to use checks because of the lack of currency, when it would prefer 
the latter, the situation is an evil. 

In the next place, the settlement of a very large proportion of 
exchanges by means of credit paper introduces a delicacy of character 
into the trading mechanism of a community which may cause it to 
be more easily upset. The larger the volume of credit settlements 
in proportion to the volume of money settlements, the greater the 
panic when confidence breaks down and the balance of canceled credit 
transactions thereby is made larger. A breakdown of confidence 
means an increase in the amount of transactions that must be settled 
by ready money. Therefore it is not a safe condition for the country 
to have the amount of actual money so small for its retail transactions 
that, when confidence fails, the strain on it will be severely felt. It 
would be better for the country to have a smaller volume of credit 
transactions and a larger volume of direct money payments. If 
the habits of the people preclude this, then there ought to be some 
means of supplying additional currency when credit as a means of 



CREDIT AND BANKING 503 

payment diminishes. This currency ought to be as safe and as 
uniform as the ordinary currency and it should be capable of being 
quickly emitted and recalled. That is, it should possess elasticity. 

6. Such evidence as there is seems to indicate that payment by 
check has shown an increase during the past few years: 

a) In the first place, the returns of our reports show a larger per- 
centage in retail trade. 

b) The prosperity of the farmers in the Central West has enabled 
many to have bank accounts who fifteen years ago could not carry 
balances. 

c) The third evidence is found in the growth of the number of small 
banks, especially in the country districts. Since national banks have 
been permitted to establish themselves with a capital of $25,000 their 
number has increased from 3,617 to 6,926. 

d) The appearance of a considerable proportion of checks in the 
deposits of mutual savings banks is also, to some degree, significant. 
Of course the credit documents received in the deposits of these banks 
may be to a considerable extent money orders. Nevertheless their 
deposits show a certain use of credit paper by the patrons of these 
banks. 

We cannot expect any social movement to continue steadily in one 
direction for an indefinite time. Such evidence as inquiries of this 
character furnish seems to show that there is a certain ebb and flow 
in the proportion of checks used in business payments. 

The volume of credit transactions very likely tends to increase 
as population and business grow. It does not increase uniformly, 
however, but by periodic movements. That is to say, the rate of 
increase of credit transactions, as compared with the whole volume 
of business, grows, as it were, by jerks and at a decreasing rate. 

One point needs to be carefully borne in mind. However great 
the volume of credit exchanges, however extensive the use of credit 
may become in a community, they can never fully displace sales for 
direct money payment. 

149. THE CLEARING-HOUSE' 

I. ORGANIZATION AND FUNCTIONS 

A clearing-house may be defined as a device to simplify and facili- 
tate the daily exchanges of items and settlements of balances among 
the banks and a medium for united action upon all questions affecting 

' Adapted from J. G. Cs.nnon, Clearhig Houses, pp. 1-131. National Monetary 
Commission, 1910. 



504 MATERIALS FOR ELEMENTARY ECONOMICS 

their mutual welfare. The tendency has been marked, especially 
in recent years, to include within the legitimate field of clearing-houses 
all questions affecting the mutual welfare of the banks and the com- 
munity as a whole. They are gradually becoming a welding force 
that ultimately will bring to the banking business of this country the 
centralization which it so greatly needs. 

The exchange of items between the banks accomplishes two 
results: First, it places at the proper banks for payment the items to 
be exchanged which the several banks hold; and, second, it determines 
the difference between the amount of the items held by each bank 
against all the others and the amount held by all the other banks 
against each individual bank. The difference constitutes the balance 
which is to be settled. The clearing-house acts merely as the agent 
of the banks in the payment of the balances. It pays to the creditor 
banks the money it receives from the debtor banks. 

The government of a clearing-house association in the United 
States is, theoretically, vested in a president, vice-president, secretary, 
treasurer, manager, and a clearing-house committee, sometimes termed 
"committee of management" or "executive committee." Not every 
association, however, is as completely officered as this; in fact, there 
are many associations that do not have the full list of officials named. 
A president, a manager, and an executive committee, however, are 
found in the organization of nearly every clearing-house association, 
for these functionaries are practically indispensable. 

The clearing-house association holds an annual meeting for the 
purpose of electing officers and committees and for the transaction 
of other business. The quorum is usually fixed at a majority of all 
the associated banks. In some instances, however, it is fixed at two- 
thirds, and in a few cases even as low as one-third, of all the members. 
Sometimes a specified number is designated as constituting a quorum. 
Each bank is expected to be represented at the annual meeting by 
one or more of the officers, but usually is allowed only one vote. 

The location of the clearing-house is always as near the center of 
the banking district as possible. It is especially important that this 
should be so in a large city, where the banks are numerous and often 
scattered over a considerable area. None of the associations, except 
the one at New York, owns its clearing-house property. Instead, the 
various organizations occupy rented quarters, usually in one of the 
banks belonging to the association, and these they have equipped 
with the necessary furniture, stationery, and desks for the various 
members. 



CREDIT AND BANKING 505 

The desks are sometimes arranged in straight rows, and sometimes 
in elliptical curves, and in a few cases they are placed like the desks 
in a schoolroom. It is not uncommon in small places for the clerks 
to meet and make their exchanges around a table, and occasionally 
the same rule prevails in large centers. 

Each clearing-house determines for itself the time when its daily 
exchanges shall be made, and as practically the only criterion in select- 
ing an hour is the convenience of the several members, it is not 
surprising that there is a wide diversity among associations in this 
regard. 

The rules regulating the kinds of matter to be cleared are by no 
means uniform. A number of organizations specify in their articles 
of association what shall be considered proper clearing matter. With 
but two exceptions, the exchanges passing through the clearing-house 
are confined to items drawn upon members or upon non-members 
clearing through members. That is to say, checks and drafts received 
by a bank member of a clearing-house in any city drawn upon another 
member of the same clearing-house, from whatever source the checks 
may have been received, are liquidated through the clearing-house; but 
checks and drafts received by a member of a clearing-house drawn 
upon some bank located at a distance, and not a member, nor clearing 
through a member, are regarded as improper matter for clearing. 

The number of messengers required to transport the exchanges to 
and from the clearing-house varies widely in different cities. When 
the business is light, as in some of the smaller cities, one person acts 
as both messenger and settling clerk, while in some of the larger cities 
the exchanges of some of the banks are so heavy that four or five 
messengers are necessary to transport them. 

Checks are taken to the clearing-house bound together with rubber 
bands or inclosed in large envelopes, the items that go to each of the 
members being kept separate. If the bulk is not too great, they are 
often carried in the hand, but it is customary in the large cities to 
transport them in leather bags or cases. 

The usual rule is that immediately upon his arrival at the clearing- 
house the settling clerk delivers to the manager, or the assistant 
manager, a ticket containing the amount of the items brought from 
his bank. 

Two methods of delivering items in the exchange room are in 
vogue. In the one case they are delivered by all the clerks simul- 
taneously; in the other by each clerk as soon as he arrives at the 



5o6 MATERIALS FOR ELEMENTARY ECONOMICS 

clearing-room; but the exchanges must all be made before a specified 
time. 

When the clerks begin the exchanges at the same time they all 
start upon the signal from the manager with their items on their 
arms or in bags or cases strapped over the back, and proceed in the 
same direction, passing along the desks until they have deposited all 
their paper. In the large cities, where the clerks are numerous, order 
and method are necessary in delivery to prevent confusion and to 
save time. But in small cities, where the clerks usually deliver their 
items as soon as they arrive, more liberty is allowed in personal con- 
duct; also by this method an opportunity is afforded to the less pro- 
ficient clerks to arrive early and list their items as fast as they are 
delivered to them from the other banks. 

When the clearings have been made, the next step is for each 
settling clerk to determine the amount of the balance of his own bank, 
which is found by taking the difference between the amount brought 
to the clearing-house and the amount taken away. A certain amount 
of time is allowed for the proof. In some cases the settling clerks do 
not remain until the proof is made, but leave for their respective banks 
as soon as they make out their tickets for the amounts brought, 
amounts received, and balances. If the manager of the clearing- 
house, or his assistant in charge of the proofsheet, finds, after he has 
made all the entries and additions, that his work does not prove, he 
first determines whether the error was made by one of the settling 
clerks or by himself. If by one of the clerks, it is usually discovered 
in a short time at the bank, whereupon the latter reports the error 
to the manager at the clearing-house, either by messenger or by tele- 
phone. If the bank fails to report the error in due time, the manager 
takes the debit and credit slips and finds it. 

The speed with which the business of a clearing-house is trans- 
acted seems almost incredible. The actual time required to make the 
exchanges varies from one and one-half minutes to ten minutes. 
When the exchanges are made simultaneously, the time varies, as a 
rule, in proportion to the number of members. In view of the short- 
ness of time required to make its exchanges, the New York Clearing- 
House affords, perhaps, the best example in existence of the success 
of modern business methods as compared with the old way of doing 
things. The clearances exceed on the average $300,000,000, and yet 
this enormous amount of paper is exchanged between the banks in 
ten minutes, and often in less time. 



CREDIT AND BANKING 507 

The clearing-houses in the United States may be divided into two 
classes, the sole function of the first of which consists in clearing notes, 
drafts, checks, bills of exchange, and whatever else may be agreed 
upon, and the second of which, in addition to exercising the functions 
of the class just mentioned, prescribes rules and regulations for the 
control of its members in various matters. The most important of 
the special functions of a clearing-house are (c) the extending of loans 
to the government, (b) mutual assistance of members, (c) fixing uni- 
form rates of interest on deposits, (d) fixing uniform rates of exchange 
and of charges on collections, and (e) the issue of clearing-house loan 
certificates. 

Clearing-houses may also be divided into two classes with reference 
to the funds used in the settlement of balances: First, those clearing- 
houses which make their settlements entirely on a cash basis, and 
second, those clearing-houses which make their settlements on some 
other basis. There are no less than five different methods of settling 
balances, in whole or in part, without the use of money at the clearing- 
house. They are (i) by manager's check on debtor banks given to 
creditor banks; (2) by borrowing and loaning balances without inter- 
est; (3) by borrowing and loaning balances with interest; (4) by the 
use of one or more of four forms of certificates, viz., gold and currency 
depository certificates. United States assistant treasurer certificates, 
and clearing-house loan certificates; and (5) by draft on another city. 

Generally speaking, about 40 per cent of the clearing-houses of 
the United States use drafts on other cities in paying their balances. 
About 30 per cent settle by manager's check, and about 25 per cent 
settle by cash alone, the remaining 5 per cent settling by a combination 
of two or more of the foregoing methods. 

Any kind of United States money is acceptable in most of the small 
clearing-houses; but in a majority of the large ones certain kinds of 
money are not acceptable. 

II. CLEARING-HOUSE LOAN CERTIFICATES 

Clearing-house certificates are of two kinds — those issued upon the 
deposit of gold coin (and in New York City and Boston on gold and 
silver certificates and legal-tender notes) and those issued upon the 
deposit of collateral securities. The former are employed in ordinary 
times solely as a method of economizing time and labor and reducing 
risk in handling large sums of money. The latter are employed in 
times of financial disturbance or panic, and although both are intended 



5o8 MATERIALS FOR ELEMENTARY ECONOMICS 

for use solely in the settlement of balances at the clearing-house, the 
circumstances that call them forth, the results effected by their use, 
and the part they play in banking economy have little or nothing in 
common. The certificates issued upon the deposit of gold, etc., are 
termed "Clearing-house certificates," and those issued upon the 
deposit of collateral security are very properly termed " Clearing-house 
loan certificates," with which latter only are we here concerned. 

Clearing-house loan certificates may be defined as temporary loans 
made by the banks associated together as a clearing-house association, 
to the members thereof, for the purpose of settling clearing-house 
balances. Such certificates are negotiable, as a rule, only among the 
members of the association, and are not in any sense to be regarded as 
currency. They are not even seen by the business community, and 
do not pass from bank to bank except in payment of clearing-house 
balances. 

The great value of clearing-house loan certificates lies in the fact 
that they take the place of money in settlements at the clearing-house, 
and hence save the use of so much actual cash, leaving the amount to 
be used by the banks in making loans and discounts, and in meeting 
other obligations. The volume of currency, to all intents and pur- 
poses, is expanded by this means to the full amount of the certificates 
issued. When the stringency in the money market seems sufiicient 
to demand it, the clearing-house association meets and appoints a 
committee called the "loan committee," consisting usually of five 
bank officers, to act in concurrence with the president of the clearing- 
house association, who serves ex officio as a member. It is the duty of 
such committee to meet each morning at the clearing-house and exam- 
ine the collateral offered as security by the banks and issue loan 
certificates thereon, in such denominations and proportions to col- 
laterals deposited as may be agreed upon. In the past the denomina- 
tions have varied from 25 cents to $100,000 in the different associations 
and in proportions varying from $50 to $100 of certificates to $100 of 
collateral deposited. 

These loan certificates bear interest at rates varying from 5 to 10 
per cent per annum, payable by the banks to which they are issued 
to the banks receiving such certificates in settlement of daily balances. 
The aim is to fix the rates sufficiently high to insure the retirement of 
the certificates as soon as the emergency which called them forth has 
passed by. 

It is by no means the general practice for all the members to take 
out loan certificates when issues are arranged by the association. 



CREDIT AND BANKING 509 

The total amount of its balances is not always paid in clearing-house 
loan certificates by a bank to which such certificates have been issued. 
Some banks are in such condition as to be able to weather the storm 
without them, while others are weak and in great need of relief. 

III. CLEARING-HOUSE LOAN CERTIFICATES USED AS CURRENCY 

Two things are characteristic of the Atlanta certificates [of 1893] 
which are not to be found in any of those [previously issued]. In 
the first place they were issued to the extent of only 66f per cent 



I 
2 



50c. 
BIRMINGHAM CLEARING-HOUSE CERTIFICATE 



No Birmingham, Ala 1893 

This Certifies that the Bank, 

of Birmingham, Ala., has deposited with the undersigned Committee 
of the Birmingham Clearing-House, securities to the value of One 
Dollar, to secure to the bearer hereof the payment of the sum of 
Fifty Cents, in lawful money of the United States, payable at any 
time after ninety days from date hereof. 

This Certificate will be received on deposit by any Bank or Banker 
of the Birmingham Clearing-House at par. 

Countersigned: 



Cashier Committee 



Form of Clearing-House Loan Certificate Used in Birmingham, Ala. 

of the collateral deposited as compared with a minimum of 75 per 
cent in the other associations; and in the second place it [was stated] 
on the certificates that they "will be received on deposit or in payment 
of debts due any bank in said clearing-house" — an implication that 
they were used for general circulation, which, indeed, is true. [The 
denominations were $5, $10, $100, and $500.] 

In June, 1893, the Clearing-House Association at Birmingham 
recommended the use of clearing-house loan certificates. Like the 
certificates in Atlanta, they were intended for general circulation 
among the customers of the banks, but, unlike any certificates pre- 
viously mentioned, they were issued to the extent of only 50 per cent 
of the collateral required. The denominations first used were $1,000, 
$500, $100, $50, $10, and $5. Certificates of $2, $1, 50 cents, and 
25 cents were subsequently issued. No other association in the 
United States had previously compared with the one at Birmingham 



5IO MATERIALS FOR ELEMENTARY ECONOMICS 

in the comprehensiveness of its currency system and in the extent to 
which it was projected on this occasion. 

In 1893, there was a considerable amount of emergency circula- 
tion taken out by the banks in the Southeast, under the title of " clear- 
ing-house certificates," in cities where no clearing-houses existed. 
In adopting the name of clearing-house certificates, it was not the 
purpose of the banks to practice deception on the people, but to 
indicate what was really true and what the term would seem to im- 
ply, namely, that such certificates were temporary loans made by the 
banks associated together, and that the banks were pledged for their 
redemption. 



No. 596 BALTIMORE CLEARING-HOUSE 

Baltimore, .18 

This is to Certify: 

That the 

has deposited with the Committee appointed by the Associated 
Banks on June 24th, 1893, Approved Securities, which are held as a 
Special Deposit to secure the redemption of this Certificate in com- 
pliance with resolutions adopted by said Banks on the day above 
named. 

This Certificate will be received for the sum of One Thousand 
Dollars without endorsement, in settlement of balances resvdting 
from the exchanges between the Banks, will bear interest at the rate 
of six per cent per annum until redeemed, and will be negotiable 
only between the Associated Banks. 
$1,000 .Manager 



Form of Clearing-House Loan Certificate Used in Baltimore 

On October 26, 1907, the same day on which the New York 
association took its action, the Clearing-House Association at Chicago 
met and passed resolutions authorizing the issue of clearing-house 
loan certificates, under conditions very similar to those governing 
their issue by other large cities. The certificates were issued under 
the supervision of the clearing-house committee to the extent of 75 
per cent of the market value of the collateral deposited and bore 
interest at the rate of 7 per cent. 

[By resolutions passed November 6 and 13, 1907, the Chicago 
Clearing-House Association provided for the issue of clearing-house 
checks, as follows:] 

"Any bank, being a member of the Chicago Clearing-House Associ- 
ation, may at any time surrender to the clearing-house committee 
any loan certificate held by it which was issued under said principal 



CREDIT AND BANKING 511 

agreement of October 29, 1907, to any member of the association and 
receive in lieu thereof checks to the amount of the principal thereof 
in denominations of $1, $2, $5, and $10, as desired, drawn by or under 
the direction of the clearing-house committee on the following banks 
designated for that purpose, viz., the First National Bank, the Corn 
Exchange National Bank, the Continental National Bank, and the 
Commercial National Bank, and made payable through the Chicago 
clearing-house or to the bank, or bearer, applying therefor, as afore- 
said, which checks shall not draw interest." 



This Check Is Payable Only through the Chicago Clear ing-Hotise and 
Must Be Collected through a Bank 

Chicago, November nth, 1907 No. D 14800 i 

CHICAGO CLEARING-HOUSE ASSOCIATION 

Pay to Continental National Bank or bearer $10 i<\,i, 
Ten and iVo Dollars 

Manager 
To 



xms 
CHECK 

IS FOR 

TEN 
DOLLARS 



The First National Bank of Chicago Assistant Secretary 

This Check Is Protected by Securities Deposited with the Chicago 
Clearing-House Association 



Form of Clearing-House Check Used in Chicago 

Thus it will be seen that the Chicago Clearing-House Association 
issued checks in amounts of $1, $2, $5, and $10 designed for general 
circulation, to the extent of about $7,500,000, secured by clearing- 
house loan certificates, which in turn were secured by 133 per cent of 
good collateral. The aggregate amount of clearing-house loan certifi- 
cates issued in Chicago was $39,240,000, and the maximum amount 
outstanding was $38,285,000 on December 18, 1907. 

[In 1907] many of the clearing-houses of the country issued clearing- 
house checks, or cashier's checks, generally under proper safeguards, 
in small denominations, which were intended for general use, to take 
the place of cash temporarily withdrawn from circulation. 

[In Canton, Ohio,] clearing-house checks, or cashier's checks, 
payable to bearer through the clearing-house only, in amounts of $1, 
$2, $5, and $10, were issued to the extent of about $200,000. These 
checks had no collateral security back of them, and were accepted 
purely on the responsibility of the issuing bank. A specimen of this 
check is shown herewith. 



512 MATERIALS FOR ELEMENTARY ECONOMICS 



$S-oo 


Canton, Ohio, November 


II, 


1907 




Pay to the Bearer 










FIVE DOLLARS FIVE DOLLARS 


$5.00 






Payable 


only through the Canton Clearing-House. 










The City National Bank 










Cashier 



Form of Clearing-House Check Used at Canton 

Most of the clearing-houses that issued both clearing-house loan 
certificates and clearing-house checks secured the checks by the deposit 
of loan certificates, which were secured by collateral, but at Los 
Angeles both the loan certificates and the scrip were directly secured 
by collateral, the former to the extent of 133 per cent, and the latter 
by securities valued at 200 per cent of the amount issued. 

150. THE JOURNEY OF A CHECK^ 

The check, which was for $43.56, was drawn by Woodward 
Brothers, of Sag Harbor, N.Y., and paid to Berry, Lohman & Rasch, 
of Hoboken, N.J., who deposited it in the Second National Bank of 
Hoboken. This bank sent it to Harvey Fisk & Sons, of New York, 
who, having no regular correspondent in the neighborhood of the bank 
on which it was drawn, sent it, along with other collections, to their 
Boston correspondent, the Globe National Bank, The Globe 
National Bank of Boston, for reasons that are not apparent, sent it, 
presumably with other items, to its correspondent at Tonawanda, 
N.Y., viz., the First National Bank of that city. The Tonawanda 
bank, evidently realizing that the check had wandered far out of its 
course, and in an effort to get it nearer home, transmitted it to the 
National Exchange Bank of Albany, which institution, pursuing the 
same commendable policy, remitted it to its correspondent at Port 
Jefferson. The First National Bank of Port Jefferson, which thus got 
possession of the check, again diverted its course by inclosing it to the 
Far Rockaway Bank. The Far Rockaway Bank sent it back to New 

' Adapted from J. G. Cannon, Clearing Houses, pp. 70-74. National Mone- 
tary Commission, 1910. 



CREDIT AND BANKING 513 

York, to the Chase National Bank, and thus this much-traveled check 
made its second call in the metropolis. The Chase National Bank, 
it would appear, endeavored to correct the wanderer's course, and 
so dispatched it to Riverhead, to H, M. Reeve. Mr. Reeve, either 
because he really knew where to send it for collection, or because of 
a lucky hit, forwarded it to the Queens County Bank of Brooklyn, 
which finally sent it home to the Peconic Bank of Sag Harbor, on 
which it was drawn. 

The reason why banks forward checks in this apparently unreason ■ 
able way, often getting the items far out of their regular course, is easy 
to explain. It sometimes appears cheaper to the bank which has the 
check in hand to inclose it with other items to some regular corre- 
spondent, which, assumedly, is nearer the bank on which the check is 
drawn, than to hunt up a special correspondent for it alone. Once 




started, the poor check gets pushed along from station to station, on 
its erratic course, until such time as, by accident or otherwise, it finds 
its final lodgment. 

The reader may estimate for himself the volume of correspondence 
which this one check caused, from the time it was drawn by Woodward 
Brothers until it was paid by the Peconic Bank, and the amount of 
postage and cost of clerical work expended upon it. No better 
argument than the facts here presented is needed to support the propo- 
sition of charging a reasonable sum for collecting out-of-town checks. 
No better illustration than this could be presented to the business man 
for demonstrating to him the weight of the burden he puts on the 
banking machinery of the community by remitting his check on a 
country bank, in payment of an account, instead of purchasing 
exchange. ' 



514 



MATERIALS FOR ELEMENTARY ECONOMICS 





m 


e! 




fi 


o 




TJ 






r! 






c3 


o 




D 


t/J 






< 




a 


lU 




1/1 


C/l 


m 




n 


< 




o 

bC 






M 


W 


1 


oj 


O 


03 


u 

)-l 


o 


^ 

d 


o 


1— 1 


:3 
o 


^ 


< 


•-3 




h-? 


X! 


^ 


c ; 


c 


-M 


^ 


oa 

1/3 


bO 


PA 


rt 


m 


P, 


O 


O 



>H -^ 



w 

M 
H 

O 



o o 






(N 



H 


O 


Iz; 


+-' 


w 


C 


^ 




w 


!-l 


H 


■*-> 


< 




H 


t« 


C/J 


n 




-M 




f1 


W 


o 


W 


o 



w bO 

o 



^ R M 



-1-1 

p^ bJD 

O OJ 

>^ ^ 

(U F^H 

ID O 

^ "*" 

+^ t3 

o ^ 

1/3 .l-H 






5 ^ c E§ 

O mU 4) 4) 






to 



ooooo ooooo ooooo ooooo ooooo ooooo 



ooooo ooooo ooooo ooooo 



ooooo ooooo 



ooooo 



ooooo 



ooooo 
ooooo 



-* O r-00 c^ 



r^ O ■* fO ro 



OOMVOt^M MTj-O 



00 00 o oi fo 



Ol -^ M Tj- t^ ► 



OOOOO OOOOO OOOOO OOOOO OOOOO OOOOO 



OOOOO 



OOOOO 



OOOOO OOOOO OOOOO 



ooooo ooooo OOOOO ooooo ooooo 



OOOOO 

ooooo 



vO t^OO ^ 00 



00 CO ro o* O 



jO^O cotHr*cow 



^ t^OC M O 



>OvO 0» t^ M 



ooooo 

88888 


o 
o o 
o o 


OOO 

ooo 
ooo 


ooooo 

88888 


§§§ 


§§ 


8§8 


8§ 


§§§§§ 


ooo 0>0 ro 
w O 00 r^ fO 
O r^oo Ov ^ 




■^ rO to 


Moooo o o> 

to lo Oi 'too 


00 w (N 
^ -o 


^00 


vo O 
to r~ O 
to to H 




■* Olio Oi to 
to >0 Ov O N 
t^ 'too 'I- 


•+r^ to •* 


Oi ^ 


H M 


to 


Tf >0 M 


H to 


■* 


lO 


fOOO^ M 



ooooo ooooo 



ooooo 



ooooo ooooo ooooo 



ooooo ooooo ooooo 



ooooo ooooo 



ooooo 



ooooo ooooo ooooo ooooo ooooo 



00 -^ to rf f^ 
O; lO lO IH O; 

rCoo vO cToo^ 



^00 to ■* 04 

000 H vO H 

o 'too_oo_ o_ 
•T to -^00 pT 



t^-o o M -^ 00 Ooo 

^00 O to to w p* u^ 



to^O tJ- tooo 



ooooo ooooo ooooo 

OOOOO ooooo ooooo 

o o o o_ o_ o_ o_ o_ q_ o_ o_ o_ o_ o_ o_ 

o" o" o" 6 6 6 6 6 6 6 6 6 6 6 o 

oioooo ooooo OOOWO 



ooooo OOOOO 



ooooo 



OOOOO 



ooooo 



OOOOO 



o o_g . o 



pq 

o S 
■M,$ 2 

S'tS cii J" . 
l^_0 O j3 ^ 

•B 0'2-B S 
;z;uS:z;o 



Is 

■^ o 

Si" 
So 






d rt 2 ?! =^ 
o "^ ^ 






(u ■ ^ rta -j^ a 
B ti u 2 o 

art jjJ3 5, 



^ c c t3 §■ 



e 0.2 wt; 
o sj5 rt S 



M S4S 
— 43 f^ 

§!■> I § 



CREDIT AND BANKING 



51S 



Q 




n 


n 















































g 




















n 




























n 


















































































u 


u 











u 








u 





u 








U 





u 













^ 







o> 


H 





fi 


Q> 


000 


^00 


<^ 


00 


fo 


r^ 


r^ 


fo 


ro 


M 


0> r^O 


m 


Q- 


N 


roo 








f^O 










r^ 










r^ 


























<i 


1^ 


^ ■* 


M 


00 








M 


^ 


fO 


M 


r^ 




M 


M 


-5 


r^ 


C? 


M 


M 


r^ 













r^ 


rO 0> "^ fO^ 


Tt o> ■* 


N 


•* 


00 


tn 





«r> -^ 


t^ o> 


10 


t^ 


r- 





(S 








li^ 





r* 


fO 


t^oo 



«^ 



00000 00000 00000 



00000 00000 



00000 



o. o. o_ o_ o_ o_ o_ o_ o. o. 

"1 ^ •* 00" 10 m" 






00 ^- f^ 



88§88 


00000 
00000 
00000 


00000 
00000 
00000 


888 


88888 
00000 


88888 
00000 


88§8§ 


NOO 10 MO 


•« fj N t^ 


lO M Ol M 


10 


PI 10 M M W 


•* 0> "1 >* 


ro 00 0> M 



fOr^OOO* OO'+^O*! 
' ' - 00 O* fO ^ ► 



00000 00000 000 00000 



00000 
00000 



00000 000 



Tt -^ r^ r^ O 



00000 _ _ 
00000 00 



00000 



f^OOOO OTj'IO'^n 



00000 00000 00000 

00000 OOOQQ ----- 



H 00 00 O O f^ 00 >^00 o 



00000 00000 



00000 



000 000 00000 00000, 00000 



O O O O t^ 



o_ o^ o_ o_ o_ o_ o_ o^ o_ o_' 

00 o t^o w f^ H 00 o 



00000 



00 £ 



0000 00000 
---- 00000 



0000 000 00000 00000 



00000 



_____ _____ -_»_» - »- 00000 00000 

00000 00000 ooOoO 000 oOooo 00000 00000 



00000 OOOOO OOOOO 000 OOOOO 



O O >^ o o 



OOOOO 



00000 

OOOOO 



OOMON OOOOO 000 lilOOMO OOOOO OOOOO 



+ 

000 




5i6 



MATERIALS FOR ELEMENTARY ECONOMICS 



w 

O 

o 

I— I 

w 
1-) 

CJ 

o 



in 

Pi 
< 

H 
< 

g 

i 


o 

a. 

Q 
1 


oooooooooo 
oooooooooo 

O 0_ <^^00 <N to w w « 00 

H oo" o" N n M~ doo" tr,^ 
POO M (^(H 0\tOO*'<tr* 

OMM^tOOT^PO^m 


t^\0 t^ fO^O C» -^t t^ H «N 

H r^t^cs Ttt^Ttt^o O 

'5°'?. 1 "t 'i; 9, o„ H « o. 




OOOOOOOOOO 
OOOOOOOOOO 

o. Q, t^ "^"^R, '^ "2 *<; ■* 1 
fooo H cT pooo yD o »o t^ 

O; '^'O^ ".. 'i, '^ Q, *^ ^ ^ 
inoo" oT dv o" -f to d "0 o" 
ii--tioo H o awoio 

^rO«tOto<^i-it-l<NH 


T3 M 


OOQOOOOOOO 

oooooooooo 

■»t M to<r 00 doo M3 6i 61 

0> to t^oO 00 »OSO \o ^ o» 

^ *^ "^ "2^ 1^ '^'^°9, 

t^ N 00 "0 -^ to lovo o tC 
vO M 00 Tj-O "* N to O 

o, o i-l '^ t "_ o_^ H o_ a 


.S 

•a 

c( 

1 








N M d 6^o6 r^yD lo Tt to 
mmmOOOOOOO 

O0'0^0^0^00l0l00^ 


to lOVO t^ t^ H CS to »0 


1 


0) 

Q 
"55 

^2; 


oooooooooo 
oooooooooo 
q q o_ o_ o_ o_ o, o_ o__o 

lo^o H o"^ dl dl cT o"od"r^ 

^OVO tOOO o w w too o 

o '^ ■* ^ ■* o °*^ ^ o; q; 
cT a d t? o" M w H d; d 

0^^0 v> VJ^O O VO O O 00 

*":'^*^*^'^'^^*":^*^ 


1) 
1 


oooooooooo 
oooooooooo 
o_ o_ o_ o_ o_ o_ o_ o_ q, o^ 

o t^ ■«? rCoo \d" dlo 00 <i- 

lOOO tOOOOO too H ITS Ot 

q_oo_ M_oo_ r-. O; '{o ^_ tj- 
pT iC loo" dv di doo xoo* 

lOIOlOTj-tOtotOtOtOtO 
fOfOtOtotototOfOtotO 


CI -y 

:§ 

rt.SS 


oooooooooo 
oooooooooo 
o_ 0, o_ o_ q q o_ o^ q, o_ 

vdo" t^ t^ ^ -^o cT vdoo 

vO t^ OvOO 00 lO o o o o 
"-> toOO O w to H lO lo to 


l^tSH00riw00»o OiO 

WOOvO»HMMIHC1fO 

q qoo_oo_^ q q q q q q 


a 
W 

1 






















July 5 

June 28 
June 21 
June 14 
June 7 
May 31 
May 24 
May 17 
May 10 
May 3 



CREDIT y\ND BANKING 



517 



152. ANALYSIS OF A NEW YORK WEEKLY BANK STATEMENT' 

The position of the clearing-house institutions was materially 
strengthened during the past week. This is indicated by the bank 
statement issued after the close of business on Saturday, which 
showed an increase in actual reserve of $4,681,650 and in cash hold- 
ings of $5,095,000. Preliminary Wall Street estimates suggested a 
much smaller gain. There was a contraction in loans of $1,216,000. 
Deposit liabilities increased $2,143,000. The excess of reserve is 
now up to $14,904,450. 

The gain in cash in excess of preliminary estimates was due to 
a liberal return of April disbursements to the banks. This usually 
occurs in the second week of the month. The decrease in loans 
was entirely unexpected in consequence of the extensive railroad 
financing of the week. However, corporations that obtained accom- 
modations in connection with their April i payments were paying 
off the same and a number of maturing Stock Exchange collateral 
loans were not renewed in the present uncertain condition of the stock 
market. 

The actual totals of the clearing-house banks and trust companies 
at the close of business on last Friday were as follows: 





April 12 


Changes 


Loans 

Deposits 


$1,910,409,000 

1,753,583,000 

46,328,000 

328,399,000 

82,497,000 


— $1,216,000 
-1- 2,143,000 

— 38,000 
+ 2,691,000 
+ 2,404,000 


Circulation 

Specie 

Legal tenders 




Cash reserve 

Cash reserve required 


$410,896,000 
395,991,550 


4- $5,095,000 
+ 413,350 


Cash surplus 

Banks cash in vaults 

Trust companies — 

Cash in vaults 


$14,904,450 
347,319,000 

$63,577,000 
47,713,000 


+ $4,681,650 

+ 5,222,000 

— $ 127,000 

- 1,459,000 


Cash in banks 



The weekly statement of averages of the associated banks and 
trust companies shows: 

' From The Journal of Commerce and Commercial Bulletin, April 14, 1913. 



Si8 



MATERIALS FOR ELEMENTARY ECONOMICS 





April 12 


Changes 


Loans • 


$1,907,468,000 

1,744,972,000 

46,394,000 

326,130,000 

80,951,000 


— $2,627,000 

— 7,796,000 
+ 47,000 
+ 8,000 


Deposits 


Circulation ! 

Specie 


Legal tenders 


-(- 102,000 






Cash reserve 

Cash reserve required 


$407,081,000 
394,230,900 


+ $110,000 
- 958,500 


Cash surplus 


$12,850,100 
344,117,000 

$62,964,000 
48,635,000 


+ $1,068,500 
+ 1,095,000 

— $1,795,000 

- 1,759,000 


Banks cash in vaults 

Trust companies — 

Cash in vaults 

Cash in banks 



153. STATEMENTS OF TYPICAL AMERICAN BANKS 
The Old National Bank or Grand Rapids, Mich. 

REPORT or CONDITION JUNE 4, 1913^ 

Resources 

Loans and discounts $5,534,983 . 27 

Bank building and fixtures 293,234. 42 

U.S. bonds and premiums 851,020.00 

Stocks and Bonds 645,478 . 90 

Cash resources: 

Due from banks $988,006. 41 

U.S. treasurer 40,000. 00 

Cash 546,918 . 00 

1,574,924-41 

$8,899,641.00 

Liabilities 

Capital stock $800,000 . 00 

Surplus and undivided profits 826,714. 57 

Circulation 800,000 . 00 

Deposits 6,472,926.43 

$8,899,641.00 

' As advertised in the Bank and Quotation Section of The Commercial and 
Financial Chronicle, August 2, 19 13. 



CREDIT AND BANKING 519 

Continental and Commercial National Bank of Chicago 

REPORT OF condition AT THE CLOSE OF BUSINESS, JUNE 4, 1913' 

Resources 

Loans and discounts $123,581,233.89 

Overdrafts 3,689. 58 

U.S. bonds to secure circulation 8,640,000. 00 

U.S. bonds to secure deposits 250,000.00 

Other stocks, bonds and mortgages 15,719,128.41 

Real estate, furniture and fixtures 13,847.00 

Premiums paid 63,062 . 50 

Due from other national banks 18,138,682 . 35 

Due from state banks and bankers 5,862,007.47 

Exchanges for clearing-house 5,709,024. 08 

Bills of other banks • 450,560. 00 

Cash items, nickels, etc 140,970. 87 

Specie 20,298,507 . 10 

Legal tender notes 15,357,940.00 

Redemption fund 432,000. 00 

Due from U.S. treasurer 640,000. 00 

Total $215,300,653.25 



Liabilities 

Capital stock paid in $21,500,000. 00 

Surplus fund 8,500,000. 00 

Undivided profits 1,594,958.31 

National bank notes outstanding 8,550,100.00 

Individual deposits subject to check 74,087,245.87 

Demand certificates of deposit 1,165,603. 22 

Certified checks 783,010. 48 

Cashier's checks outstanding 776,776. 21 

Due to other national banks 60,259,316. 25 

Due to state banks and bankers 37,248,655 . 29 

Dividends unpaid 1,134.00 

United States deposits 408,853 . 62 

Reserve for taxes 425,000. 00 

Total $215,300,653.25 

' From the Hand Book of t)w Banks issued by the Chicago Evening Post, June, 
1913- 



520 MATERIALS FOR ELEMENTARY ECONOMICS 

GiRARD Trust Company op Philadelphia 

STATEMENT OF CONDITION AT THE CLOSE OF BUSINESS 
NOVEMBER 6, IQIl' 

Resources 
Reserve Fund: 

Cash, specie, and notes $1,957,826. 75 

Due from approved reserve agents 4,170,407 . 06 



$6,128,233.81 

Nickels and cents 5,765 . 56 

Checks and cash items : 9,510. 97 

Due from banks and trust companies not in reserve 308,979. 83 

Loans upon call with collateral 14,396,986. 14 

Time loans with collateral 7,033,816. 67 

Loans secured by bonds and i^ortgages 22,000. 00 

Bonds, stocks, etc 16,677,878. 57 

Mortgages and judgments of record 202,956.43 

Office building and lot 2,415,394. 90 

Other real estate 476,564. 68 

Overdrafts 206 . 83 



$47,678,294.39 

Liabilities 

Capital stock paid in $2,500,000. 00 

Surplus fund 7,500,000. 00 

Undivided profits, less expenses and taxes paid 2,374,206. 22 

Individual deposits subject to check (exclusive of trust 

funds and savings 30,862,582 . 15 

Demand certificates of deposit (exclusive of trust funds and 

savings) 57,8i7 • 85 

Deposits, municipal 1,500,000. 00 

Due to banks and trust companies, etc., not in reserve. . . . 2,846,677. 27 

Dividends unpaid .' - . 545 . 00 

Treasurer's and certified checks outstanding 36,465 . 90 



$47,678,294.39 



Amount of trust funds invested $124,093,252. 10 

Amount of trust funds uninvested 1,408,514. 59 

Overdrafts 17,570.45 



5125,519,337-14 



^Report of the [Pennsylvania] Commissioner of Banking for 191 1, Part I, pp. 
728-29. 



CREDIT AND BANKING 521 

Total amount (i.e. face value) of trusts under deeds of 
trust or mortgages executed by corporations to the 
Company as trustee to secure issues of corporate 
bonds, including equipment trusts $970,950,166. 66 

Total amount of securities deposited by corporations with 
the Company as trustee to secure issues of collateral 
trust bonds $291,239,185 . 66 



The Dollar Savings Bank of Pittsburgh 

statement of condition at close of business 
november 6, i911' 

Resources 
Reserve fund: 

Cash, specie, and notes $ 150,152.90 

Due from approved reserve agents 1,853,134. 10 

Legal securities at par 600,000 . 00 

$ 2,603,287.00 

Nickels and cents 26 . 69 

Checks and cash items 1,212.17 

Loans on call with collateral 1,750,030.00 

Loans secured by bonds and mortgages 129,400.00 

Bonds, stocks, etc 15,153,836. 25 

Mortgages and judgments of record 9>3S7)839. 61 

Office building and lot 300,000 . 00 

Other real estate 145,202 . 63 

Miscellaneous assets 17,200. 00 

$29,458,034.35 

Liabilities 

Surplus fund . . : $ 1,044,885. 57 

Undivided profits, less expenses and taxes paid 554,846. 20 

Individual deposits, time 27,858,243. 18 

Miscellaneous liabilities 59 • 40 

$29,458,034.35 

' Report of the [Pennsylvania] Commissioner of Banking for 191 1, Part I, p. 270. 



522 



MATERIALS FOR ELEMENTARY ECONOMICS 



CO 

< 
pq 



o 
I— I 

H 
P 

;z; 
< 

H 
<! 
H 

H 
< 
> 

o 

p=^ 
w 

pq 



§ S ^ 

^ "D y 



I I 






fe 2 ^ 



\ 


\, 








V 

\ 
\ 

V 




/ 










« 




^ 




^ 




\ 
\ 


\ / 












2 










^ 


\ 














•9 
9 














H 


\ 
\ 










3 


















\ 
\ 








• 
















\. 


1 








■* 
















) 


, 1 

I'l 1 


























; 1 


























1' 








5 












































V 








1^ 

9> 


















\ 


























\ 








a 


















\ 


\ 
























\ 
\ 


\ 
























\ 
\ 




\ 




• 






1 












i 


\ 










1 1 

! 1 












\ 
\ 


\ 









5 


ii . 

i 1 - 












\ 

\ 
\ 


\ 




i 

3i 














\ 


\ 
\ 








1 












\ 1 


• 




^ 




1 1 












\ 1 






R 














































'. 1 






r^ 



CQ 



^ 



O 



-w 


H 


? 


-> 


(-1 


C! 










.JS> 




s 




a 


a 


K| 












(^ 


>, 






^J' 


a 






11) 




Fl 


c 



M 1 
. o 



CREDIT AND BANKING 



523 



155. STATEMENTS OF THE BANK OF ENGLAND, THE BANK 
OF FRANCE, AND THE REICHSBANK 

Bank of England 

accounts for the week ended july 2, 1913^ 

Issue Department 

Notes issued. . .' £53,901,665 Government debt £11,015,100 

Other securities 7,434,900 

Gold coin and bullion. . . 35,451,665 



£53,901,665 



£53,901,665 



Banking Department 

Proprietors' capital.. . . £14,553,000 Government securities. £12,756,505 

Rest 3,345,465 Other securities 40,661,622 

Public deposits* 14,737,272 Notes 24,271,745 

Other deposits 46,633,003 Gold and silver coin .... 1,595,921 

Seven-day and other 
bills 17,053 



£79,285,793 £79,285,793 

♦Including E.xchequer, Savings Bank, Commissioners of National Debt, and Dividend Accounts 



Bank of France 

returns for july 3, 1913' 

Debtor 

Capital of the bank 

Profits in addition to capital 

Reserve 

Reserve of landed property 

Special reserve 

Notes in circulation 

Interest on securities 

Bank notes to order 

Treasury account 

Current accounts, Paris 

" " branch banks 

Dividends payable 

Discounts and sundries 

Rediscounts 

Sundries 



Figures from The Economist (London), July 5, 1913. 



Fr. 182,500,000.00 

8,006,145.84 

22,105,750.14 

4,000,000 . 00 

8,407,444.16 

5,663,027,165.00 

62,779,698.87 

4,330,652.80 

229,395,514- 55 
591,285,833.77 
108,926,472.00 

12,994,551- II 

3,352,415.21 

5,532,896.00 

380,086,275.76 

Fr. 7,286,730,815. 22 



524 MATERIALS FOR ELEMENTARY ECONOMICS 

Creditor 

Cash in hand Fr. 3,945,569,423 . 82 

Commercial bills overdue 64,100. 23 

Discounts in Paris 614,944,245 . 05 

Foreign bills 21,831,290. 95 

Treasury bills 134,579. 23 

Discounts in branches 1,220,876,898.00 

Advances on bullion at Paris 15,394,000. 00 

" " " branch banks 

Advances on Securities at Paris 209,851,250.61 

" " " " branch banks 538,637,070.00 

Advance to the State 200,000,000 . 00 

Temporary advances (floods) 6,398,500. 00 

i) Government stock (reserve fund) 12,980,750. 14 

2) " " (disposable fund) 99,586,202.25 

Rentes immobiUsees (Government stock) 100,000,000.00 

Premises and furniture 42,101,019 . 22 

Expenses of management Ij734,393 • 44 

Employ special reserve 8,304,499. 16 

Sundries 248,322,593.12 



Fr. 7,286,730,815.22 
The Reichsbank 
balance sheet oe december 30, 1912^ 
(All items are stated approximately to the nearest thousand marks) 

Assets 

1. Gold in bars and foreign coin M. 337,334,000 

2. Specie: 

Cash M. 699,701,000 

Notes of the Imperial Treasury. . 15,723,000 

Reichsbank notes 3,313,649,000 

Notes of other banks 12,767,000 

4,041,840,000 

3. Bills 2,036,916,000 

4. Loans 176,704,000 

5. Securities 108,310,000 

6. Due to the bank on current account with its corre- 

spondents 67,511,000 

7. Amount of overdue and unpaid bills 9,121,000 

8. Value of real property belonging to the bank 67,023,000 

9. Sundry Assets .' ; 37,924,000 



M.6,882,683,000 



'Adapted from The Banker's Magazine (London), XCVI, 242-43 (August, 
1913)- 



CREDIT AND BANKING 525 

Liabilities 

1. Capital M. 180,000,000 

2. Reserve fund 70,048,000 

3. Reserve fund for doubtful debts 5,993,000 

4. Total amount of notes created 5,833,147,000 

6. Deposits not bearing interest 393,000 

5. Amount due on clearing and current accounts 746,464,000 

7. Duty on note issue due to the Imperial Treasury 4,628,000 

8. Sundry liabilities 14,013,000 

g. Net profit for 1912 M.37,407,000 

Less: 

a) Preliminary dividend 

to shareholders . M. 6,300,000 

b) Paid to reserve fund 3 , 1 1 1 ,000 



9,411,000 

27,996,000 
Unappropriated profits of 1911 . . . . 1,000 



27,997,000 



M.6,882,683,000 



156. THE ELASTICITY OF CURRENCY' 

By the term "elasticity" as applied to a currency is meant the 
capacity to expand and contract with an increase or decrease in the 
demand for it — that is the adaptation of currency supply to currency 
need. Indeed, elasticity consists quite as much, if not more, in the 
capacity to contract as to expand. 

Entirely apart and distinct from the occasional emergency 
demands for currency growing out of extraordinary or panic condi- 
tions, which it is not intended to discuss at this point, there are 
numerous variations in the demands for currency at different times 
in the year, arising from methods of doing business, and especially 
from the ebb and flow of industrial activity at different seasons. 
Where wages are paid weekly, for example, it is evident that there 
will naturally be a greater demand for currency, or a medium of 
exchange, on Saturday night and early in the week, than there would 
be a few days later when the amounts received in wages at the close 
of the previous week had been largely spent and returned to the banks 
in the stream of deposits from local tradesmen. If wages were paid 

' Adapted from the Report of the Monetary Commission of the Indianapolis 
Convention (1898), pp. 309-31. 



526 MATERIALS FOR ELEMENTARY ECONOMICS 

only at monthly intervals, the variations on this account would be 
even greater. The amounts then required to make payments on the 
last day of each month, or the amount which the workmen of that 
community might hold on the evening of that day, would be much 
more than the amount of currency which would be in the hands of 
these same workmen four weeks later. In other words, there would 
be in such a community material monthly fluctuations in the demand 
for media of exchange, due to the methods followed in making pay- 
ments for labor. 

Similarly, the practice of paying rents, settling accounts, etc., 
at monthly or quarterly intervals, wherever it prevails, leads to a 
considerable increase in the demand for media of exchange at certain 
periods, and a falling off at other periods; while the practice of pay- 
ing dividends on stocks, and interest on bonds or on mortgages at 
definite quarterly, or semi-annual, or annual intervals, which has 
become* so marked in the development of these forms of investment, 
greatly intensifies the increased demand for some means of payment 
at such dates. 

But, perhaps the most marked instance of this periodically in- 
creased demand grows out of the marketing of the crops. Manu- 
factured goods are, in general, capable of being marketed continuously 
throughout the year, and it is the aim of manufacturers so to adjust 
their production that this end will be secured. In the case of agri- 
cultural products, however, the circumstances are otherwise. The 
greater part of our immense agricultural crops is marketed within a 
period of three or four months. From the necessity of placing such 
large amounts of these products on the market at fixed recurring 
periods, arises one of the most marked seasonal demands for an 
increased medium of exchange. 

Some of our ordinary media of exchange possess the character- 
istic of elasticity — the capacity of expanding and contracting with 
these varying needs of business — to a much greater degree than others. 
The deposit-currency by means of which the largest part of our com- 
mercial transactions is effected is particularly elastic. It expands and 
contracts automatically with every change in demand. If additional 
currency is wanted in a strictly commercial community for any of 
these extraordinary demands — by a railroad, for example, to provide 
for the payment of interest on its bonds^it is secured from an exist- 
ing deposit, or by means of a loan granted in the form of deposit- 
currency against which checks for the interest are drawn; and to the 



CREDIT AND BANKING 527 

extent which those to whom the interest is paid likewise make use 
of the check and deposit system, the whole transaction is carried 
through without the least trouble or friction. This currency expands 
freely and automatically to meet any real need, and contracts as 
easily as it expanded when it is no longer desired. 

But manifestly not all these needs which have been suggested for 
increased supplies of a medium of exchange can be met by an expan- 
sion of the deposit-currency. Whether or not any particular demand 
can be so met, will depend largely upon the business habits of the 
community and the commercial development of the individuals or 
the character of the transactions. 

In the payment of weekly wages, for example, the deposit-currency 
is very rarely used, even in the more highly developed commercial 
centers; either coin or some form of note-currency is required. But 
in this case the periods are so frequent that the demand may be said 
to be practically constant, as the necessity of providing for it is always 
present, and there is little opportunity for making any other use of the 
funds required for this purpose in the brief intervals when they are not 
actually in use. 

The parties to monthly payments on account of wages, rents, and 
accounts, though still requiring a large use of the note-currency, do 
make a larger use of the deposit-currency than the classes just referred 
to. And when the quarterly and half-yearly settlements of accounts, 
rents, dividends, and interest are considered it is found that in all 
communities of high commercial development the deposit-currency 
is the form most used. And, as already suggested, so far as this 
particular medium of exchange is used, there is no ground for com- 
plaint on the score of inelasticity. The increased demands for 
currency arising from these transactions are in fact met by so auto- 
matic an adjustment of the supply that little visible evidence is left 
that there has been any fluctuation in the demand.' 

The most marked variations in demand for currency in this 
country occur in connection with the annual marketing of the crops. 
Owing to the fact that the agricultural classes involved in these ffT^ 
transactions do not use the check and deposit system to any great 
ivCxtent, this demand is largely for a note-currency. The farmer on 
selling his crops may ^t^fsed' receive a check in payment; but as he 
and a large part of the community with which he deals do not find 
the check and deposit system convenient, he is not satisfied with 
that sort of payment. He cashes the check at the bank, or through 



528 



MATERIALS FOR ELEMENTARY ECONOMICS 



some merchant, and thus secures the form of currency which he 
requires. If he cashes it with a merchant, a portion may be merely 
offset against his account at the "store" where he deals, and to that 
extent the demand may be satisfied without resort to note-currency. 
But not so with the balance; for that he must have coin or notes. 

Note Issues of the Imperial Bank of Germany' 



PER 
CENT 


1894 


1895 


PER 
CENT 


)AN. FEB. MAR. 


APR. MAY JUNE 


JULY AUG. SEP. 


OCT. NOV. DEC. 


IAN. FEB. MAR. 


APR. MAY JUNE 


JULY AUG. SEP. 


OCT. NOV. OEC. 


145 


















145 


















140 
135 


















140 
135 
















1 
















h 


130 
















y\ 


130 












\ 




''\* 


125 








\ 








\ 


125 
















y 


120 








U 1 




. 


\J 


M 


120 


1 


\ 




\h 


I 


w 


\r 




115 








y VVI 


\ 


^v 


V 




115 


















liO 




\h 


V 




V 








no 




M 


V 




Vv 








105 






V 












105 




W 














100 


















100 



















' Figures are percentages of the lowest circulation during 1894-95. 

Some of this currency is used at once in settling outstanding accounts, 
and thus gets back to the bank almost immediately through the de- 
posits of the tradesmen. To this extent the demand is of short dura- 
tion. The rest of the currency is paid out from time to time during 
the fall and winter for "help," and in the purchase of the winter's 
supplies, or is held in cash in many cases to meet spring payments on 
a mortgage. The net result is that the average farmer has in his 



CREDIT AND BANKING 



529 



possession for the three or four months after he has sold his crop, a 
much larger sum of money or notes than during the three or four 
months immediately preceding. Taken in the aggregate, this makes 
a largely increased demand for currency in the form of notes in the 
fall season of the year. 

In Germany, the absence of the development of the check and 
deposit system has left the burden of increased demand to fall almost 
exclusively on the note-currency. The result is a much more marked 
fluctuation in the supply of that particular medium of exchange than 
was exhibited in England, Ireland, or Scotland, where the extreme 
elasticity of the deposit-currency permitted the heaviest demands 

Note Issues of the National Banks of the United States 



PER 
CENT 

105 
100 


1894 


1895 


PEK 

CENT 

105 
100 


JAN. FEB. MAR. 


APR. MAY )UNE 


JULY AUG. SEP. 


OCT. NOV. DEC. 


IAN. FEB. MAR. 


APR. MAY JUNE 


JUIY AUG. SEP. 


OCT NOV. DEC 


















" ■■■- 














"^ 










~~~ ^ 


-^ - .^ 

















The data given in the heavy line are the statements of outstanding circulation 
ordinarily quoted. They include, however, notes still held in the vaults and tills 
of the issuing bank; and, to the extent that this amount varies at different seasons 
of the year, this puts the circulation on a different basis from the others described 
and thus vitiates comparison. Fortunately we have the required data given on 
the same basis as in the other systems for the five dates in each year for which 
reports are made by the Comptroller of the Currency. This information is platted 
on the diagram in the broken line, and is such as to indicate that even if we had 
similar figures for weekly or monthly periods the elasticity shown would not be 
materially greater. 

to be met without the use of notes. It will be noticed that in addition 
to the movements in January, April, July, and October, resulting 
from the settlement of dividends, interest and other quarterly pay- 
ments, there are well defined monthly movements arising from the 
requirement of more currency in the settlement of accounts, rents, 
salaries, etc., at the end of each month. 

The currency problem in the United States is mainly an agricul- 
tural one, for the reason that the commercial centers are already 
supplied with a currency of the maximum elasticity — namely, deposits. 
In the distinctly agricultural sections, however, practically the same 



530 MATERIALS FOR ELEMENTARY ECONOMICS 

demands for currency exist as in Canada — the chief characteristic 
of which is an urgent need in the autumn, at the time the crops 
are being marketed. Owing, however, to the inelasticity of our 
bank-note currency, the demand does not find an automatic response 
in our circulation. That the demand exists, however, is evidenced 
in several ways — ^partly through its effects, and partly through the 
means which are taken to satisfy it. 

There is, for instance, a well-defined annual movement of cur- 
rency out of New York and the financial centers. This takes place 
regularly every year, commencing usually in July and August and 
continuing until well into December. The net movements of money 
between New York and the interior are reported each week in the 
financial journals. From these it appears that during January and 
February the country is usually emptying its idle money into New 
York; in March there is a slight reaction, lasting only a few weeks, 
and from May until August, the tide again flows strongly toward New 
York. With August the turn comes, and the movement to the interior 
is again strong and continuous until December. 

This method of meeting an increased demand for currency in 
certain sections, mainly by withdrawing supplies from other districts, 
has its effects on the currency conditions of the places which are called 
upon to furnish the supplies of currency. It is so in the case of New 
York. With the commencement of the outward currency movement 
the surplus reserves of the New York City banks begin to decline. 
The usual period of currency shipments West and South is the period 
of diminishing reserves, and in December, as the current turns, the 
reserves again fill up. The rates of interest on call loans, it is well 
understood, vary inversely with the surplus bank reserves. When 
reserves are low the rate of interest is sure to be high, and when 
reserves are above normal, the call loans are again made at low rates 
of interest. 

There is another way in which the efforts of the banks of this 
country to meet the enlarged autumnal demand in rural communities 
is manifested. This is through the operations of the banks in those 
sections. That the demand is for note-currency, is a fact well known 
to the bankers. In consequence, the affairs of each bank are as far 
as possible so shaped as to enable it to respond. In default of any 
opportunity for the rural banks to expand their issues, the first 
source of supplies of currency for this purpose is, of course, their own 
local reserves. These are at the commencement of the autumnal 



CREDIT AND BANKING 531 

demand usually large enough to permit a considerable reduction, 
without reaching the danger point. The next step is the securing 
of additional currency from their reserve agents in the cities by with- 
drawing a portion of their balances on deposit ; and a final step is the 
securing of currency in the shape of loans from city bank-correspond- 
ents mainly in the form of rediscounts. 

157. THE ALDRICH-VREELAND ACT OF 1908' 

The Act of May 30, 1908, provided for "emergency issue." 
Under its terms a national bank having an unimpaired capital and 
a surplus of not less than 20 per cent and having outstanding regular 
U.S. bond-secured notes to the amount of 40 per cent or more of its 
capital stock, could do one of two things in order to issue these 
emergency notes: 

(i) It could join a, national currency association ma.de up of not less 
than ten such banks having an aggregate capital and surplus of at 
least five millions of dollars. The bank could then deposit with the 
association "any securities, including commercial paper," and could 
then, under proper supervision by the Comptroller of the Currency, 
issue "additional" notes to the amount of 75 per cent of the cash 
value of these securities, "provided that upon the deposit of any of 
the state, city, town, county, or other municipal bonds, of a charac- 
ter described in section three of this Act [see (2), below], circulating 
notes may be issued to the extent of not exceeding 90 per centum of 
the market value of such bonds so deposited: And provided further, 
That no national banking association shall be authorized in any event 
to issue circulating notes based on commercial paper in excess of 
30 per centum of its unimpaired capital and surplus." 

(2) It could make direct application to the Comptroller of the Cur- 
rency for "additional" notes to the amount of 90 per cent of the 
market value but not in excess of the par value of certain bonds 
deposited with the Treasury. These bonds must be "bonds or 
other interest-bearing obligations of any State of the United States, or 
any legally authorized bonds issued by any city, town, county, or 
other legally constituted municipality or district in the United States 
which has been in existence for a period of ten years, and which for a 
period of ten years previous to such deposit has not defaulted in the 
payment of any part of either principal or interest of any funded 

• Adapted from 35 U.S. Statutes at Large, 546. 



532 MATERIALS FOR ELEMENTARY ECONOMICS 

debt authorized to be contracted by it, and whose net funded indebted- 
ness does not exceed lo per centum of the valuation of its taxable 
property, to be ascertained by the last preceding valuation of property 
for the assessment of taxes." 

Certain general regulations, applicable to either of the cases above 
indicated, were imposed: 

1. These "additional" notes fell under the provisions of laws 
applicable to "ordinary" notes unless otherwise distinctly specified. 

2. The total amount of notes (additional plus ordinary) any bank 
could issue was not to exceed the amount of its capital and surplus. 
The total of "additional" notes for the entire country was not to 
exceed $500,000,000. This amount was to be allotted to the different 
sections of the country on a basis of the proportion which the capital 
and surplus of national banking associations of the particular state 
bore to the total capital and surplus of national banks in the entire 
country. 

3. Banks issuing these "additional" notes must "pay for the 
first month a tax at the rate of 5 per centum per annum upon the 
average amount of such notes in circulation, and afterward an 
additional tax of i per centum per annum for each month until a 
tax of 10 per centum per annum is reached, and thereafter such tax of 
10 per centum per annum, upon the average amount of such notes." 

4. These "additional" notes could be withdrawn at any time by 
the deposit of lawful money or national bank notes with the Treasurer 
of the United States. Herein they were somewhat different from 
" ordinary " notes. This latter class could be withdrawn at a rate not 
to exceed $9,000,000 during any calendar month. 

5. Arrangements were made to have notes printed in advance 
and placed at convenient points so that they could be utilized quickly 
if occasion should demand. 

The act made certain changes in other features of our banking 
system. The ones deserving particular mention were : (i) " Ordinary " 
notes, if based upon the 2 per cent bonds of the United States, 
were to be taxed j of i per cent each half-year. If based upon bonds 
bearing a higher rate of interest, they were to pay a tax of | of i per 
cent each half-year. (2) National banks need not hold reserves against 
the deposits of public money by the United States. 



CREDIT AND BANKING 533 

158. A SUMMARY VIEW OF THE WORK OF THE 
INDEPENDENT TREASURY' 

I. HISTORICAL SUMMARY 

1. The policy of the government has been changeable. In the 
first few years after the adoption of the Constitution, before the 
subject attracted serious pubhc attention, there were no specific 
places for the custody of the pubhc money, and it was left largely 
in the hands of collecting and disbursing officers. 

2. During the existence of the first and second United States 
Banks, that is, from 1796 to 1811, and from 1816 to 1833, the date of 
the "removal of the deposits," the pubUc money was kept mainly 
in these institutions and their branches. Nevertheless, even during 
these periods some state banks were employed. 

3. In the interim between the closing of the first United States 
Bank and the opening of the second, the public money was kept mainly 
in the state-chartered banks. These banks were also used after the 
government ceased to employ the second United States Bank in 
1833, and also after the expiration of the charter of that bank until 
the establishment of the independent treasury in 1846. 

4. Beginning with 1847, immediately after the establishment of 
the independent treasury, the public money was kept in the Treasury 
and subtreasuries, and no banks were used until after the establish- 
ment of the present national banking system, in 1863. Since that 
time the depositary banks have supplemented the use of the sub- 
treasuries as places for the keeping of the public money. 

5. In the past one hundred and twenty years, therefore, there 
are only seventeen, 1 847-1 864, in which the government did not 
use depositary banks for keeping the pubhc money. 

6. The evidence therefore shows that there has been, uniformly, 
a strong tendency for the government, throughout its history, to use 
banks. 

7. The causes of this tendency are shown to have been the greater 
convenience in the management of the pubhc money, the desire of 
the Secretary and the pubhc that government fiscal operations should 
interfere as httle as possible with the monetary circulation and with 
business conditions, the necessities of the government, and pressure 
from banking and other interests. 

' Adapted from David Kinley, The Independent Treasury of llie United States 
and Its Relations to the Banks of the Country, pp. 323-30. National Monetary 
Commission, 1910. 



534 MATERIALS FOR ELEMENTARY ECONOMICS 

8. Under the influence and pressure described, first the Secretary 
of the Treasury, and later Congress, have given way, and virtually 
abandoned the policy of independence in the keeping and manage- 
ment of public money which was established by the act of August, 
1846. Congress authorized the use of national banks in which to 
deposit receipts from internal revenue. With some vacillations, 
the extent of the use of the banks as depositaries for these receipts 
has steadily increased. By recent legislation receipts from customs 
may also be deposited in the banks. Under the first interpretation 
of the law permitting these deposits, they could accrue only as the 
collecting ofiicers placed the money received by them in the banks and 
not from the transfer of government receipts once deposited in the 
treasuries. By later practice the latter method of deposit has also 
been adopted and is claimed by some to be legal. Under present 
practice and legislation, therefore, the Secretary of the Treasury has 
a free hand to put any and all receipts of public money in the de- 
positary banks. The independence of the Treasury depends entirely 
upon the will of the Secretary. 

9. A further departure from the policy of independence is shown 
by the course of opinion and legislation concerning security for deposits. 
Under the law as passed, public deposits were to be secured by United 
States bonds and otherwise. This was understood to mean United 
States bonds in addition to a personal bond. Eight years ago the 
phrase was differently interpreted, and banks were permitted to 
secure deposits on the basis of other than United States bonds as se- 
cuiity. The practice thus established was legalized between two and 
three years ago. 

ID. At first the banks which obtained public money on deposit 
were expected to keep a reserve against it, as provided by the law of 
their being. Some seven or eight years ago this practice was broken 
and the banks allowed to hold public deposits without protecting them 
by a reserve. The practice thus initiated was also later made legal. 

II. Finally, with all these changes, the amount of pubKc money 
deposited with the banks has steadily increased, until at one time in 
recent years, only a comparatively small working balance was kept 
in hand by the Treasury itself. 

II. OPERATION AND INFLUENCE 

I. The independent treasury system disturbs the money market 
in ordinary times by its irregular intake and output of money. If 



CREDIT AND BANKING 535 

the intake happens to occur on a rising speculative market it may do 
some good by restricting speculation. It if happens to occur when 
business operations call for an easier market, the influence is hkely 
to be harmful. Corresponding results flow from the relative times 
of the occurrence of the output. These influences are intensified 
when government receipts exceed expenditures for considerable 
periods. 

2. In times of crises, or panic, the independent treasury may aid 
the money market (a) by depositing a surplus revenue in the banks 
and thus restoring the money to circulation; (b) by prepaying interest 
on the public debt, by "timing" interest, pension, and other pay- 
ments; and (c) by buying bonds. 

The first method is open to the objection that pressure from the 
banks for a general distribution may prevent the deposits from being 
made in sufficient measure where they are most needed. Then, 
too, the charge of favoritism in the selection of banks has been made. 
Further, if such deposits are to be made there is no good reason for 
requiring security, or for excusing the banks from maintaining a 
reserve against such deposits. Moreover, the Secretary of the 
Treasury should be allowed to check against these deposits instead of 
being compelled to use the present compressed method of withdrawal. 

The prepayment of interest and the "timing" of other payments 
are too trivial to be worthy of a great government. 

Attempts made to relieve the money market by buying bonds 
are open to the objection that there is a loss involved in prepaying 
the debt. 

All the modes of relieving the money market are open to the three 
general objections that the process puts too great power in the hands 
of the Secretary; that, however well he discharges his responsibility, 
he is likely to make mistakes which will make the situation worse; 
and that any such interference must be, from its nature, arbitrary. 

3. Objections may be made against the independent treasury in 
the fiscal operations of the government in time of war. Although 
by means of the system the Treasury succeeded in placing its loans 
during the Mexican War, it failed to do so in the Civil War. It also 
failed during the time following 1890, although this was not a period 
of war. It succeeded, in a way, in placing the Spanish War loan 
directly, but ventured to make the experiment only after securing 
the assurance of the banks that they would sustain it. In all impor- 
tant loan negotiations in the past fifty years the Treasury has been 
obliged, in one way or another, to rely upon the banks for aid. 



536 MATERIALS FOR ELEMENTARY ECONOMICS 

4. The main advantage claimed for the direct placing of loans 
by the independent treasury is that the loans are more widely dis- 
tributed or more popular. Experience shows that this is not the 
case. Even though the loan be widely distributed at first, the securi- 
ties soon become concentrated in the hands of a few holders, princi- 
pally the banks. There is reason to think, too, that in time of war 
a loan can be placed at less expense through banks and banking 
syndicates. 

5. The money may be regarded as safe. Experience shows, 
however, that defalcations and thefts may occur under the system. 

6. The system has had the support of popular opinion. This 
support arises from the fact that the system worked well for some time 
after it was established, thus forming a striking contrast with the 
evil operation of the state bank depositaries. Moreover, there is a 
popular distrust of banks, especially large ones. 

III. PROPOSALS FOR THE REPLACEMENT OF THE SYSTEM 

1. Enlarge the present national bank depositary system by 
putting the receipts of the government immediately into the banks 
when collected, without a deposit of bonds as security, the banks to 
pay a reasonable rate of interest to the government on its balances, 
and the government ofl&cers to check against accounts like other 
depositors. Deposit in banks throughout the country, as now; or 
only in reserve city banks. 

2. Modify the first proposal by dividing the country into clearing- 
house or bank depositary districts. Establish a clearing-house for 
each district, and enlarge the functions of the clearing-house so as 
to make it the agent for all the banks of the district, with which the 
government officers may deal directly. Under this system all govern- 
ment moneys will be deposited with the clearing-house or district 
bank, which will be responsible to the government, and it may rede- 
posit with the banks of its district under arrangements to be provided. 

3. Establish a central bank independent of the government and 
of existing banks, which shall be the depositary and fiscal agent of 
the government. 

4. Establish a federated bank to include all national banks. 
This, of course, is a form of central bank. Instead of being inde- 
pendent of the existing banks, it would be a federation of them. 

5. Make the Treasury itself a government bank by enlarging its 
present banking functions and giving the Secretary a staff of expert 
business and banking advisers. 



CREDIT AND BANKING 537 

159. BANKERS' VIEWS OF OUR BANKING AND CURRENCY 

NEEDS' 

The following are some of the answers prepared by the Currency 
Commission of the American Bankers' Association to questions formu- 
lated by a subcommittee of the Banking and Currency Committee of 
the United States Senate. 

I. What are the essential defects of our banking and currency 
system ? 

Answer, a) A principal defect of our system is the absolute 
rigidity of our currency. A bank in order to take out circulation must 
invest more money in government bonds than it is permitted to issue 
in currency, thereby impairing, rather than increasing, its power to 
aid commerce and trade. 

Outside of the three central reserve cities there is no redemption 
of national bank notes, except when and as they wear out and become 
unfit to circulate. This condition is inherent in the system and is 
certainly unsound. 

b) The system lacks cohesiveness, there being no provision for 
co-operation among the banks in it. Under ordinary conditions this 
is not so much felt by the banks individually, but under strained 
financial conditions, when each bank is thrown on its own resources 
and must in self-protection act independently of all the rest, the lack 
of a system under which all could co-operate through a common 
policy of action becomes keenly felt and it becomes evident that what 
is really lacking is a system. 

c) The requirement that the banks must individually control their 
own portion of the legal reserve money of the country, without being 
provided with proper means for the protection or replenishment of 
their legal reserves, is unscientific and economically wasteful. 

d) An unsound system of reserves under which in periods of 
anxiety it becomes necessary in the protection and maintenance of 
individual reserves for each bank in the national system to contend 
against every other bank ; the dissipation and scattering of the great 
bulk of the reserve money of the country into a large number of small 
hoardings, completely destroying in times of stringency the strength 
and power which might be gained by unification and massing of 
reserves for the mutual support of the banks and the common good 
of the public. 

■ Adapted from a pamphlet issued by the Currency Commission of the Ameri- 
can Bankers' Association, 1913. The numbering of the questions has here been 
changed. 



53^ MATERIALS FOR ELEMENTARY ECONOMICS 

e) The use of so much of the legal reserve money of the country 
in actual circulation for ordinary business purposes is another economi- 
cal waste. No provision is made for the use of any substitute for 
legal reserve money as a circulating medium other than the national 
bank notes secured by government bonds, which are as inflexible in 
their volume and therefore as irresponsive to the fluctuating com- 
mercial needs for them as the legal reserve money itself. The gold 
certificates now in circulation, amounting to $1,085,489,000, being 
merely warehouse receipts for an equal amount of gold in the govern- 
ment treasury, form the most conspicuous example of this economic 
waste. 

/) The lack of elasticity in the circulation, all forms of our present 
circulating medium being rigidly fixed in amount. The necessities of 
commerce for a circulating medium are arbitrarily met with a fixed 
amount of it, which does not respond in its volume to the fluctuating 
demands. Assuming that the aggregate amount may be just suffi- 
cient for an average volume of general business, then there must be 
a surplus when the volume of business falls below the average and a 
deficiency when the volume of business rises above the average. The 
actual condition, however, is that in each year there are seasons in 
which the needs for circulation are much heavier than they are in 
other seasons, so that its inadaptability in volume to the legitimate 
existing demand is constantly felt. We have as a rule either a surplus 
or a deficiency. 

g) The restriction of the use by the banks of their legal reserves 
and the prohibition of their lending power in the presence of unusual 
demands upon them, without means of protecting their reserves by 
the use of any satisfactory substitute therefor, or of replenishing them 
through adequate rediscounting facilities, which would enable them 
to convert their available assets into cash or legal reserve. 

h) The lack of provision for the organization of American banking 
institutions in foreign countries, which are necessary for the develop- 
ment of our foreign trade. 

i) The independent treasury system, under which the government 
acts as partial custodian of its own funds, resulting in irregular with- 
drawals of money from the bank reserves and from circulation and 
materially interfering with the even tenor of general business. 

_;') No open market for commercial paper; banks of sufficient 
capital should be allowed to accept drafts, for a commission, with a 
view to the sale of the acceptances in the open market, thereby estab- 



CREDIT AND BANKING 539 

lishing a current market for commercial paper and thus enabling 
banks to buy, whenever they have an overplus of funds, or sell in this 
market, whenever they wish to strengthen their position or meet 
demands against them, or accumulate funds for the use of their 
regular clientele. 

2. Enumerate concisely its advantages and disadvantages. 
Answer: a) One advantage of our banking system is that it 

enables each community to organize and control its own banking 
facilities. 

b) It has for half a century provided the government with a 
market for its bonds. This was a great advantage to the government 
at the time the banking system was inaugurated and it has since been 
taken advantage of by the government to reduce by two-thirds the 
rate of interest on its bonds. On some issues of its 2 per cent bonds 
it has obtained a premium, notwithstanding the fact that without 
this artificial market their investment value would be about 30 per 
cent below par. 

c) Another advantage of no small importance in view of the con- 
ditions of the bank note circulation of the state banks at the time the 
bank act was enacted is that it has provided a bank note circulation 
of uniform value, which in spite of its defects is of undoubted strength 
and stability. 

Its disadvantages are covered in the list of its defects. It might, 
however, be stated as an offset to the advantages referred to, (b) and 
(c), that the artificial market maintained for government bonds has 
been so maintained at the expense of the banking development and 
commercial growth of the country, both of which have been seriously 
retarded by the costly periodical panics for which the defects of the 
banking and currency system are principally responsible. 

3. Should national banks continue to have a bond-secured cur- 
rency ? 

Answer: No. In the use of government bonds as security for 
circulation, the volume of currency, instead of fluctuating with the 
varying requirements of trade, is limited by the volume of bonds and 
fluctuates according to their market prices. These prices are deter- 
mined, not by the general investment value of the bonds, but by the 
profit possible to banks in using them as security for circulating notes, 
resulting in artificial stimulation of government bond prices. One 
unfortunate consequence of this artificial condition is that the nation's 
bonds, which should be widely held by its citizens as their choicest 



540 MATERIALS FOR ELEMENTARY ECONOMICS 

investment, are held almost exclusively by banks to secure circulation 
or government deposits. 

4. Should an elastic currency be authorized by law? If so, 
should it be limited, and to what amount ? 

Answer: Regarding an elastic currency as a vital necessity in 
connection with the banking and currency system of this country, 
we believe that such a currency should be authorized by law. The 
amount of it should be controlled by the gold reserve requirements 
against it. Such gold reserve should be ample, not less than 50 per 
cent as a recognized minimum. A special tax might be levied upon 
any deficiency of the reserve below the stipulated amount of it, this 
tax to be increased as the deficiency increases. Such provision would 
in our opinion prevent over expansion of the currency. 

5. Should such currency be the notes of the individual banks, or 
of a central reserve association, or of a number of regional reserve 
associations, or of the United States Treasury ? 

Answer: Preferably by a central reserve association. Good 
results may be accomplished by a number of regional reserve asso- 
ciations, if the control of their resources were properly placed under 
central joint control of the government and the banks. Doubtless a 
safe currency could be issued by the United States Treasury, if the 
law providing the same were properly drawn, but it would seem diffi- 
cult if not impossible to provide for its proper expansion and con- 
traction in accordance with the demands of trade. The experience of 
the world is that it is better for a government to provide for such 
currency indirectly, through some privately owned corporation under 
strict governmental supervision, rather than put the credit of the 
government at issue with every note placed in circulation. Trouble- 
some times come to every community and every nation, and it is 
better then to have the credit of the bank called in question, than the 
credit of the government itself. 

6. If a tax on this currency payable to the government is pro- 
vided, should it be graduated so as to increase with the volume of 
currency issued by the reserve association, or graduated so as to 
increase with the length of time it is outstanding ? 

Answer: A tax upon the deficiency in reserve graduated on a 
scale increasing as the deficiency increases removes all necessity or 
reason to tax notes either in proportion to volume or to length of time 
outstanding. The tax might be regulated so as to become prohibitive 
before the reserve could fall to what might be regarded as the danger 
point. 



CREDIT AND BANKING 541 

7. Should there be a central reserve association with branches, 
or a number of reserve associations with or without a central control ? 
If a number of reserve associations under central control, should that 
control be wholly with representatives of the various associations, or 
wholly by the government, or by giving both representation ? 

Answer: In our opinion one central reserve association with 
branches would best serve our present necessities. Failing that, a 
small number of regional reserve associations, also with branches, 
might be organized to serve the purpose. The smaller the number of 
regional reserve associations, however, the more effective the reserve 
control. If there are to be a number of regional reserve associations, 
they should be under some kind of central control in which both the 
government and the various associations should have representation. 

Three objections to the regional reserve associations occur to us: 

First: They will divide the cash reserves of the country into as 
many different ownerships as there are regional associations. No 
individual bank can now strengthen its cash reserves without at the 
same time and to the same extent depleting the reserve of some other 
bank, so with the regional reserve associations, no one of them will 
be able to strengthen its cash reserves without drawing them from 
and reducing to the same extent the reserve of one of the other asso- 
ciations. 

Second: In connection with the shipping of reserve money from 
one section of the country to another. Under one central reserve 
association with branches this could be accomplished without change 
of ownership of the money shipped, as it would belong to the one 
association irrespective of what branch had custody of it. In the 
case of independent regional reserve associations no such transfer of 
reserve money could be made from one region to another without a 
change in ownership. It would increase the reserve of the association 
that received it and deplete by a similar amount the reserve of the 
association that ships it. In times of financial stress when each 
regional reserve association would be husbanding its resources for the 
benefit of its own constituents, this might produce an undesirable and 
awkward situation, the interests of the various sections of the country 
being at variance. Such effect will be intensified in direct ratio to the 
number of regional reserve associations. 

Third: Under one ownership and control of the reserves, transfers 
of funds could under normal conditions be accomplished by book 
entries rather than by the shipment of money. 



542 MATERIALS FOR ELEMENTARY ECONOMICS 

8. Should such reserve associations have state bank and trust 
companies as stockholders; and if so, what requirements should be 
made of such state banks and trust companies ? 

Answer: State banks and trust companies should be included as 
well as national banks. They should be under the same requirements 
as to capital, surplus and examination. 

9. What should be the general nature of the business of such an 
association ? 

Answer: Regional reserve associations should act as the principal 
fiscal agent of the United States for the region in which they are 
located; buy and sell United States and other government and state 
bonds; receive deposits from the government and member banks; 
discount for its members; buy and sell exchange here and abroad; buy 
and sell gold coin and gold and silver bullion; have similar dealings 
with other regional reserve associations and any other transactions 
with them which would insure fullest co-operation for efficiently 
serving the business interests of the country. 

They should not accept any deposits other than those of the gov- 
ernment and of the participating banks and they should not pay 
interest on deposits. 

They should rediscount for and with the indorsement of any bank 
having a deposit with them, commercial paper of short maturity 
and bills of exchange arising out of commercial transactions. The 
discount rate, which each regional reserve association should have 
power to fix for itself, should be equal to all participating banks in 
the region, should be made public, and should be subject to change 
when in the opinion of the directors a change is desirable. 

10. Should every national bank be required to keep its reserve 
with the association to which it belongs except such as it keeps in its 
own vaults ; or should it be permitted to keep any certain percentage 
of its reserve with other reserve associations ? If so, how much ? 

Answer: In connection with this question as to whether national 
banks should be required to keep all their reserves with the regional 
reserve associations to which they belong, or sihould be permitted to 
keep any certain percentage of them with other regional reserve asso- 
ciations, the question arises whether the banks are to keep their 
active checking accounts for exchange and collection purposes with 
the regional associations, or not. If each regional reserve association 
is to handle the exchange and collection accounts of its member 
banks, then the further question arises: Could the regional reserve 



CREDIT AND BANKING 543 

associations also handle such accounts of the banks outside of their 
own region? Could, for instance, the regional reserve association 
located in the city of New York undertake to handle the exchange 
accounts of the banks all over the country that need New York 
accounts, and if so, should such banks be permitted to count their 
balances in the New York regional reserve association as a part of 
their reserves? In our opinion, the regional reserve associations 
could not be satisfactorily organized so as to handle economically 
the enormous amount of work entailed by the keeping of such 
accounts. We are therefore of opinion that the reserves of the banks 
kept with the regional reserve associations should be confined to their 
balances, kept with the regional reserve association in which they are 
shareholders. The banks in the reserve and central reserve cities 
now acting as reserve agents should be permitted to continue so to 
act. The reserves of the banks outside of the reserve cities should 
be divided equally into three allotments, one- third to be kept in their 
vaults, one-third to be kept on deposit with the regional reserve asso- 
ciation in their own district, and one-third on deposit with their duly 
appointed legal reserve agents in reserve or control reserve cities; 
the same division of reserves might be applicable to the banks in the 
reserve cities; and the banks in the central reserve cities might be 
required to keep one-half of their reserves in their vaults and the 
other half on deposit with the regional reserve association, which of 
course would be located in their own cities. 

The reserve balances maintained with correspondent banks are 
the basis of credit as well as other valuable banking privileges extended 
to the banks maintaining such balances. Being legal reserves, the 
balances are upon the average fairly steady, the amount of daily 
turnover increasing or diminishing the same as the case may be. In 
order to have their daily business handled and their exchanges paid 
and establish a basis of credit, the interior banks must maintain 
active accounts in important business centers. It follows that if 
such balances may not count as reserve, and funds must in addition 
be deposited with regional reserve associations, it will materially 
curtail the loaning power of the country banks, and their power to 
serve the public. The requirement imposes the heaviest burden 
upon the banks of the interior which will be under the necessity of 
carrying with their active correspondents and regional reserve asso- 
ciations combined, much larger balances than now. 

II. Should a reserve association have transactions with banks 



544 MATERIALS FOR ELEMENTARY ECONOMICS 

other than its own members, and if so, what character of transactions 
should be permissible ? 

Answer: The regional reserve associations should have no trans- 
actions with banks other than their own members, except that they 
should be authorized to maintain accounts and have transactions with 
selected banks in the financial centers of the principal foreign countries, 
and to buy and sell exchange and prime acceptances in the open 
market. 

12. Should national banks be permitted, upon payment of a 
commission to loan their credit by accepting bills arising out of the 
ordinary course of commerce, and should reserve associations be per- 
mitted to deal in these acceptances in transactions with banks or 
other reserve associations? 

Answer: The accepting of bills arising out of the ordinary course 
of commerce by the banks should not be confined to national banks 
as such, but to all banks having a capital of $1,000,000 or over, and 
which are members of reserve associations; and regional reserve 
associations should be permitted to deal in such acceptances in their 
transactions with banks or with other regional reserve associations, 
or in the open market. 

13. As one of several plans suggested to mobilize the banking 
reserves and provide elastic currency, it has been suggested that the 
Treasury Department establish a division to be called a ''Federal 
Reserve Division," which should conduct reserve agencies in each 
reserve city to exercise the functions of the proposed reserve banks; 
receive capital from member banks to the extent of 10 per cent of 
their capital and surplus; pay 5 per cent interest to the banks upon 
such capital, but without permitting the banks to manage the reserve 
agencies directly or indirectly; that such reserve agencies should 
discount short-term prime commercial paper and furnish Treasury 
note currency, where needed, to member banks under reasonable 
safeguards to prevent inflation, thereby mobilizing the reserves and 
furnishing elastic currency directly to the qualified banks. This 
suggestion carries with it a more thorough examination of the national 
banks and makes the indebtedness to the government by such banks 
a first lien on the assets of the banks. What do you think of such 
a suggestion ? 

Answer: It is possible for the Treasury Department to furnish 
the country with a safe currency. It would be very difficult, if not 
impossible, to make that currency elastic, in the sense of contracting 
and expanding according to the needs of the public. The experience 



CREDIT AND BANKING 545 

of commercial nations is that results can be better accomplished by 
the creation of a privately owned central organization dominated and 
controlled by the government, as for instance, the Imperial Bank of 
Germany, or the Bank of France. It serves to take the matter out 
of politics. 

The great danger is that if borrowers go direct to the Treasury, 
politics would become an all important and dominating influence. 
Our government experienced great difficulty in retiring the green- 
backs in gold as presented, at a recent period, although their total 
amounted to less than $350,000,000. Four bond issues during one 
administration became necessary to obtain gold for that purpose. If 
the amount of Treasury notes outstanding were to be multiplied by 
seven or eight, the responsibility resting upon the government would 
be still greater. With an overflowing Treasury and ample gold no 
anxiety would be felt, and little difficulty would be experienced in 
meeting such obhgations, but we know from the past that we are 
bound to have times in the future when the Treasury will not be 
overflowing and the gold reserve will be encroached upon, and the 
credit of the government would then be unnecessarily brought in 
issue. We cannot have any credit in the country better than that of 
the government under which we live, and it is for the interest of all 
to protect that credit against all possible danger. Our own expe- 
rience for the last fifty years, in fact ever since the creation of our 
government, as well as the experience of other nations, militates 
against this general proposition. The policy of the government has 
been to protect itself against maturing liabiHties, by making even its 
future obligations payable on or after a fixed date at its pleasure. 
The proposal that it should assume not only large demand liabilities 
on note issues but also enormous demand liabilities in the form of 
bank reserve deposits would be a radical and dangerous reversal of 
its policy. 

160. THE CASE AGAINST STATE GUARANTY OF BANK 
DEPOSITS^ 

Looked at in the abstract such legislation never had any real reason 
for existence. It was an unwise and unjust "remedy" for an imagi- 
nary evil. It was unwise because of its inevitable tendency to lessen 
responsibility in bank management, its weakening of the incentives for 
prudence whether in fixing interest rates, in granting accommodation, 

■Adapted from A. Piatt Andrew, "The Essential and the Unessential in 
Currency Legislation," the Page Lecture delivered at Yale University, May i, 1913. 



546 MATERIALS FOR ELEMENTARY ECONOMICS 

in declaring dividends, or in building up a surplus, or in any of the 
other matters that enter into the conduct of a bank. It was unjust 
because it taxed well-managed institutions for the consequences of bad 
judgment, imprudence, or dishonesty in the conduct of other institu- 
tions, for which they were in no way responsible, and which, however 
aware they might be of their existence, they had no means whatever 
to prevent. It was certainly unfair to stockholders in carefully 
managed banks to oblige them to protect persons who did not do busi- 
ness with them, but had preferred banks of less conservative policy. 
But above all the deposit guaranty legislation was uncalled for. The 
losses entailed upon depositors because of bank failures are not of 
sufficient proportions to demand so drastic a remedy. In the national 
banks during the more than half-century in which the federal system 
has existed, according to the comptroller of the currency, these losses 
have amounted on the average to only about 3-100 of i per cent of the 
aggregate deposits, and there is no evidence to show that the losses 
have been any greater in the state-chartered institutions, except in 
those states in which the deposit guaranty has been operating. 

It is not altogether clear just what was aimed at by the deposit 
guaranty agitators, but in all likelihood the objects sought, in so far as 
they were reasonable and legitimate, could have been more easily and 
adequately and less dangerously attained by other means. If what 
was desired was to utilize the service and security of the government in 
handling the savings of people who are distrustful of banks, and so to 
reduce the hoarding of actual cash, this object has been far more 
satisfactorily attained by the establishment of the postal savings 
system and the issue of postal savings bonds in small denominations. 
If, however, what was desired was to make it possible for a bank at its 
discretion to insure its depositors against loss in case of insolvency, 
which would seem to have been the object in the states where the 
"voluntary" system was adopted, this could have been accom- 
plished, as the decisions of the Supreme Court have shown, without 
further legislation through the agency of private insurance firms. 
But if what was desired was to insure to depositors in thoroughly 
solvent banks the immediate availability of their deposits at all times, 
this end would be best accomplished, not by making the assets of 
such banks liable for the debts of insolvent institutions, but by adding 
to our present banking system such facilities as would insure to solvent 
banks the possibility of always translating their sound assets immedi- 
ately and without limit into available funds. This is the fundamental 
desideratum of our currency system. 



XII. INTERNATIONAL TRADE AND FOREIGN 
EXCHANGE - 

i6i. THE FOREIGN TRADE OF THE UNITED STATES, 1912-13' 

The detailed figures given by the Department of Commerce show 
that the fiscal year ended June 30, 191 3, was the banner year in the 
trade of the United States with foreign countries, the total trade 
exceeding $4,275,000,000 and surpassing the total trade of the fiscal 
year 191 2 by over $421,000,000. Imports into the United States in 
the year exceeded $1,812,000,000 and exports from this country 
exceeded $2,465,000,000, making a balance of trade in our favor of 
over $652,900,000. The imports surpassed those of the fiscal year 
191 2 by over $159,700,000, and the exports were more than $261,500,- 
000 greater than those of last year. 

A survey shows that the greatest gain in our exports is in manu- 
factures ready for consumption, in which class there was an increase 
of more than $105,000,000 over 191 2. There was also a substantial 
gain of over $60,000,000 in manufactures for further use in manu- 
facturing, but the increase in foodstuffs partly or wholly manufactured 
was only a little over $1,500,000. 

Looking at the figures by grand divisions it will be seen that the 
aggregate trade of the United States with Europe in the fiscal year 
just ended was over $2,371,000,000, or more than one-half our total 
foreign trade. This was divided into over $892,000,000 worth of 
imports and $1,479,000,000 worth of exports, a balance of trade in 
our favor of more than $586,000,000. The aggregate trade with the 
other countries of North America exceeded $979,000,000, of which 
over $361,900,000 were imports and over $617,400,000 were exports. 
The remainder of our foreign trade, amounting to about $925,000,000, 
was divided among Asia, South America, Oceania and Africa, in the 
order named. 

The United Kingdom maintains its position as our best customer, 
having purchased from us over $597,000,000 and sold us over $295,- 
000,000 in the year, an aggregate trade of more than $892,000,000. 
Our second best customer is Canada, which bought from us over 
$415,000,000 and sold us over $120,000,000, a total trade exceeding 
$535,000,000. Third comes Germany, which bought from us over 
$331,000,000 and sold us only a little less than $189,000,000, an 

' From The Journal of Commerce and Commercial Bulletin, August 7, 1913. 

547 



548 



MATERIALS FOR ELEMENTARY ECONOMICS 



aggregate trade of more than $520,000,000. France is fourth with 
purchases from us in excess of $146,000,000 and sales to us in excess 
of $136,000,000, a total trade of over $282,000,000. 

Merchandise Imported from and Exported to Each of the 

Principal Countries During the Fiscal Year Ended 

June 30, 19 13 (000 Omitted) 



Grand divisions — 

Europe 

North America . . 
South America . . 

Asia 

Oceania 

Africa 

Total 

Principal countries- 
Argentina, 

Australia 

Belgium 

Brazil 

Canada 

China 

Cuba 

France 

Germany 

India, British . . . 

Italy 

Japan 

Mexico 

Netherlands. . . . 

Russia 

United Kingdom 



Imports 



$892,866 

361,943 
217,747 
276,452 

37,543 
26,425 




Exports 



M ,479,076 

617,411 

146,147 

115,056 

79,102 

29,088 



$2,465,884 



43,351 
66,845 
42,638 

415,260 
21,326 
70,581 

146,100 

331,684 
11,040 
76,285 
57,741 
54,571 

125,909 
26,465 

597,150 



Imports and Exports of the United States, by Great Groups, 
During Fiscal Year Ended June 30, 19 13 (000 Omitted) 





Imports 


Exports 


Groups — 

Foodstuffs in crude condition 
and food animals 


$211,458 
194,680 

633,224 
348,886 

410,608 
14,120 


$181,693 


Foodstuffs partly or wholly 
manufactured 


320,401 


Crude materials for use in 
manufacturing 

Manufactures for further use 
in manufacturing 

Manufactures ready for con- 
sumption 


730,963 
408,992 
778,008 


Miscellaneous 

Foreign merchandise exported 


8,447 
37,377 






Totals 


$1,812,978 


$2,465,884 







INTERNATIONAL TRADE AND FOREIGN EXCHANGE 549 

162. THE TRADE BALANCE OF THE UNITED STATES' 

The term "trade balance" is generally used for the purpose of 
indicating the excess value of a country's exports of merchandise 
over the value of its imports of merchandise or the excess value of a 
country's imports of merchandise over the value of its exports of 
merchandise. In the sixteenth, seventeenth, and eighteenth cen- 
turies a favorable trade balance was a matter of great concern to 
statesmen and to financiers. At that time it was supposed that 
any country which imported goods of greater value than the goods 
it exported would be seriously injured by having tp make payment 
in the precious metals, and that any country which persisted in pur- 
chasing goods of greater value than the goods it exported would be 
totally drained of its stock of the precious metals and would be 
ruined. Efforts to secure favorable trade balances led to the passage 
of many laws for restricting imports and for stimulating exports. 
As commerce developed and international banking advanced it was 
recognized that a nation could under certain circumstances purchase 
goods of a greater aggregate value than it exported, without sustain- 
ing any drain upon its stock of the precious metals or suffering any 
inconvenience whatsoever, and in recent time no one has paid any 
great amount of attention to the question of the trade balance other 
than for the purpose of ascertaining the factors which caused the 
imports of certain countries largely to exceed their exports or of dis- 
covering the reason for the exports of certain countries largely 
exceeding their imports. 

I. CAPITAL INVESTMENTS AND TRADE BALANCES 

When a country commences to invest capital in other lands its 
exports begin to exceed its imports. Capital investment by one 
country in other lands means that that country is willing to sell 
goods to other lands, and to take payment in securities of one class 
or another. Should the capital investments extend over only one 
year the exports of the lending country in the year in which the 
loan is made would exceed its imports to the extent of the sum 
invested. Should no additional investments be made, the imports 
of the lending country in the following years would exceed its exports 
to the extent of the interest or dividends it received upon the capital 
invested. As time goes on, and the total amount of capital invested 

' Adapted from George Paish, The Trade Balance of the United States, pp. 153-97, 
National Monetary Commission, 19 10. 



55© MATERIALS FOR ELEMENTARY ECONOMICS 

by it in other lands attains to larger and larger figures, the annual sum 
received as interest upon the capital embarked rises correspond- 
ingly. In this case the balance of exports over imports resulting 
from the investment of capital becomes smaller and smaller in conse- 
quence of the increasing sums received per contra from the interest 
upon the capital previously invested. After a time the annual sums 
which a lending country receives for interest exceed the additional 
sums it lends in each year, and in spite of its continued investment 
of capital in other lands its imports exceed its exports. 

In the same way the trade balances of countries which borrow 
capital from other lands are affected by the produce they import 
in respect of the capital they borrow and by the export of produce 
for the payment of interest. A country beginning to borrow from 
other lands imports a larger amount of produce than it exports. 
When the interest payments of a borrowing country amount to large 
figures, its exports appreciably exceed its imports even in years in 
which it borrows freely. 

There is practically no country which neither exports nor imports 
capital, with the exception of Thibet. This type of country may be 
left out of consideration. The chief countries which supply capital 
to other lands are Great Britain, Germany, France, Holland, Bel- 
gium, and Switzerland. Of these countries, Great Britain is by far 
the most important lender. This country has about $15,000,000,000 
of capital invested abroad and is adding to its colonial and foreign 
investments at the rate of upward of $500,000,000 a year. Ger- 
many and France come next with investments of about $8,000,000,- 
000 each. The investments of Holland, Belgium, and Switzerland 
are of much smaller amount, but are nevertheless considerable. The 
imports of all these five countries largely exceed their exports in 
consequence of the receipt of interest. 

The principal countries whose exports exceed their imports in 
consequence of the large amount of interest they have to pay on capi- 
tal borrowed from other lands are the United States, the Austral- 
asian colonies of Great Britain, British India, Argentina, Brazil, 
and Mexico. Several other countries whose imports now exceed 
their exports will eventually come into this category. At the present 
time Canada's imports largely exceed her exports in consequence of 
the vast amount of capital — about $200,000,000 a year — which she 
is borrowing from other lands — almost entirely from Great Britain. 
In the course of time the Canadian indebtedness to other countries 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 551 

and the expenditures of her tourists, etc., will be so great that her 
exports will exceed her imports, although large amounts of capital 
will continue to flow into the country each year. Of course Canada 
will have no difficulty in making these interest payments, having 
regard to the rapid growth in the annual amount of wealth created 
by means of the capital she is importing. China, Japan, and Chile 
are other instances of borrowing countries whose imports exceed 
their exports in consequence of the inflow of large amounts of foreign 
capital. 

II. Europe's capital investments in the united states 

Almost from the day that it was discovered the United States has 
obtained supplies of capital from Europe. In the sixteenth, seven- 
teenth, and eighteenth centuries the capital was imported for the 
development of sugar, tobacco, and cotton plantations and for mer- 
cantile purposes. Early in the nineteenth century large sums of 
money were invested by Great Britain in the securities of the United 
States government and in state and municipal government bonds. 
The application of steam to land traction greatly widened the need 
for capital in the United States, and London was asked for capital 
for railway construction. But it was not until the fifties and sixties 
that any large amount of capital was raised in London for railway 
construction. 

In the fifties, sixties, and early seventies large sums of capital 
were invested by Europe, mainly by Great Britain and Holland, in 
the federal and state government loans, in municipal securities, in 
railroad bonds and stocks, and in the shares of land, mining, and other 
ventures. But the chief borrowers were railways. By 1883 the 
amount of American railway securities quoted in London amounted 
to the large total of $1,535,000,000. Since the early eighties the 
accumulation of capital in the United States itself has been on a 
great scale, and the federal and state governments have been able to 
borrow at home at lower rates of interest than the rates at which they 
could obtain capital from the investors of Europe. But the amounts 
of capital needed by American railways have been beyond the power 
of the American people to supply, and large amounts of capital have 
been invested by Europe in American railway and other securities. 
At the end of 1908 the securities of American railways quoted in the 
London Stock Exchange "official list" were of the nominal value 
of $7,500,000,000. Further, there are a large number of American 



552 MATERIALS FOR ELEMENTARY ECONOMICS 

industrial and other securities quoted in London which raises the 
total to over $9,000,000,000. Only a portion of this vast amount of 
securities quoted in London is owned by British investors. Great 
Britain possesses about $3,500,000,000 of American securities. To 
this sum has to be added the considerable amounts invested by the 
Continent. Large amounts of German, Dutch, and French capital 
are embarked in American undertakings, principally railways. A 
statement drawn up in 1902 at the instance of the French minister of 
finance from reports suppHed by French diplomatic agents and con- 
suls in various parts of the world placed the total amount of French 
capital invested at that time in the United States at 600,000,000 
francs, or $120,000,000, but this figure appears to have been an under- 
estimate. It is true that few issues of American securities are pub- 
licly quoted on the Paris Bourse, but relatively large amounts have 
been purchased privately by French investors in London and in New 
York. The French investments in the United States, including the 
Pennsylvania Railroad and other loans placed in Paris since 1902, 
amount to nearly 2,500,000,000 francs, or $500,000,000. 

Estimates of the amount of capital invested by Germany in the 
United States were made in 1905 by the German Admiralty and pub- 
lished in a work entitled Die Entwicklung der deutschen Seeinteressen 
im letzten Jahrzehnt. These estimates placed the amount of German 
capital in the United States and Canada in 1904 at from 2,500,000,000 
marks to 3,000,000,000 marks, say, $625,000,000 to $750,000,000. 
Since 1904 considerable additional sums of German capital have been 
invested in the United States. German bankers place the amount 
of the German investments in American securities at about $1,000,000,- 
000. The amount of Dutch capital in the United States is about 
$750,000,000. American securities are also held in Belgium, Switzer- 
land, and in other countries. In the aggregate the amount of Euro- 
pean capital invested in "permanent" securities in the United States 
is approximately $6,000,000,000. 

Beyond the fixed capital invested by Europe in the United States 
account has to be taken of the floating loans made by Europe to 
America. These floating loans are mainly incurred in the spring and 
summer months in anticipation of the produce shipments from the 
States in the fall months and they are then largely liquidated. The 
amount of the floating debt of the United States to Europe in the form 
of produce bills, finance bills, loans against securities, overdrafts, 
etc., averages about $400,000,000, reaching a larger sum in July and 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 553 

early August and falling to a much lower sum at the end of December. 
The rate of interest paid upon this floating debt, in so far as it consists 
of produce bills, is a very low one, the rate of interest charged on this 
class of loan being less than that on any other kind of security. 

Including both the fixed investments and the floating loans, the 
amount of capital borrowed by the United States from other countries 
is about $6,500,000,000, the annual interest charge upon which is 
about $300,000,000. 

An offset to the large amount of capital invested in the United 
States is the capital invested by American citizens in other countries, 
more especially in Mexico, Canada, in the South American States, in 
the Philippines, in Cuba, etc. The amount of American capital 
invested in other lands in this manner both publicly and privately is 
probably $1,500,000,000, yielding an income of about $75,000,000 
a year. By deducting the interest — $75,000,000 — received upon 
American capital placed abroad from the interest — $300,000,000 — 
which the United States pay upon capital supplied to them by other 
lands, I arrive at a net payment of $225,000,000 by the United States 
to other countries for interest and dividends upon capital. This sum 
the United States has to remit each year by exports of produce. 

III. TOURIST AND OTHER EXPENDITURES 

The number of American citizens visiting other lands in the 
course of the year is now upward of 200,000. The data I have been 
able to obtain as to the expenditures of these tourists shows that the 
sum expended by them approximates $1,000 per person. This sum 
includes merely the passage money and the sums expended in other 
countries for food, transportation, and other miscellaneous expendi- 
tures. It does not include the sums expended upon works of art, 
jewelry, clothing, etc., which are declared at the customs and are 
included in the value of the goods imported into the United States. 
In the aggregate, tourist expenditures for the purpose I have men- 
tioned reach a total of about $200,000,000. On the other hand, a 
number of foreign tourists visit the United States and their expendi- 
tures should be placed against those of American citizens. Appar- 
ently the number of visitors is about 30,000. The expenditures of 
visitors to the United States may be taken at about $1,000 per 
person, excluding all shipping transportation, or an aggregate sum 
of visitors' expenditures in the United States of $30,000,000. On 



554 MATERIALS FOR ELEMENTARY ECONOMICS 

balance, therefore, the United States has to pay to other countries 
a sum of about $170,000,000 a year to cover tourist expenditures. 

IV. EXPENDITURES OF IMMIGRANTS AND EMIGRANTS 

There is another movement of population which creates large 
debit and credit items in the American trade balance. Each year a 
considerable number of persons, who previously had migrated to 
the United States, return to take up their residence in Europe. 
The numbers of these persons greatly fluctuate. In the four years 
previous to 1907 they averaged somewhat over 300,000 a year. The 
average amount of money carried by the 300,000 "emigrants" who 
leave the United States each year is not a very large sum; on the 
average it was probably not more than $200 per head, or a total sum 
of about $60,000,000. On the other hand, account has to be taken of 
the money brought in by immigrants from other lands. The average 
sum brought into the country is about $50 per head. In the aggre- 
gate the money brought into the country by immigrants probably 
reaches $50,000,000 per annum. 

For all practical purposes I calculate that the money brought into 
the country by immigrants about counterbalances the money taken 
out of the country by emigrants returning to their native lands and 
by "other than cabin passengers" visiting other countries. 

v. REMITTANCES TO FRIENDS 

The great prosperity of the United States enables many of its 
citizens who have come from other lands to make gifts of large sums 
of money in the aggregate to friends in the old countries. The 
remittance of this money means that the United States have to send 
considerable quantities of produce abroad for which there is no 
corresponding item on the import side of the account, as the produce 
goes for the purpose of providing the funds necessary to cash the 
postal money orders and other drafts remitted to friends. The amount 
of these remittances is exceedingly difficult to calculate, but that it 
is large everyone admits. Mr. Charles F. Speare estimates that 
out of the savings of the foreign-born in America $250,000,000 a year 
are going abroad and that the annual rate of increase is about 10 per 
cent. The annual distribution of this great sum throughout Europe 
is, he says, in the following proportions: 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 555 

Italy $70,000,000 

Austria-Hungary 65,000,000 

Great Britain 25,000,000 

Norway and Sweden 25,000,000 

Russia 25,000,000 

Germany 1 5,000,000 

Greece 5,000,000 

All others, including France, Switzerland, Bel- 
gium, and Denmark 10,000,000 

From the data I have been able to obtain, I cannot confirm the 
calculation that the remittances to friends are as much as $250,- 
000,000 a year. In the first place, a portion of this money is remitted 
by persons returning to live in Europe, whose remittances I have 
already allowed for. Secondly, many of the money orders and 
drafts are sent to Europe to pay for goods purchased. Very large 
numbers of small parcels of goods are imported and figure in the 
imports of produce. These small parcels are usually paid for by small 
drafts or by postal money orders. With the data at my disposal 
I do not feel justified in placing the amount of money remitted by 
American citizens to friends in other countries at a larger figure 
than $150,000,000. This is still a very large sum, and is a factor of 
great importance in calculating the trade balance of the United States 
and the amount of produce which has to be remitted for various pur- 
poses other than to pay for goods imported. 

VI. FREIGHTS 

The United States possesses a mercantile marine large enough to 
convey but a small portion of the produce they export and import, 
and considerable payments have to be made for shipping services. 
In 1907-8 the imports into the United States by sea were valued at 
$1,123,000,000. Of this amount 13.5 per cent was carried in Ameri- 
can vessels and 86 . 5 per cent in foreign vessels. In the same year 
the exports from the United States were valued at $1,670,000,000, 
of which amount the produce conveyed in American vessels was 
only 7 . 2 per cent and the balance of 93 . 8 per cent was conveyed in 
foreign vessels. The sum which the United States had to pay to 
other lands for marine transportation is much smaller than is usually 
calculated. In the first place, other countries have to pay the cost 
of transporting the produce they purchase from the United States, 
and there is no burden upon America for freight upon goods shipped 



556 MATERIALS FOR ELEMENTARY ECONOMICS 

to other lands. Indeed, there is a credit item on goods exported, 
inasmuch as 7 . 2 per cent of the whole of the goods exported in 1907-8 
was conveyed in American vessels. The freight which the United 
States has to pay for is that upon the imports conveyed in foreign 
vessels less the freight earned by American vessels in conveying 
exports. Thus the net amount of freight payable is in respect of 
goods amounting in value to about $850,000,000. There are, how- 
ever, other credit items to be taken into consideration. The foreign 
vessels carrying goods from the United States to other countries are 
usually coaled and provisioned for the outgoing voyage in American 
ports, and the value of the coal and provisions supplied to them must 
be deducted from the payments which the United States has to make 
for freight brought into the country in foreign vessels. After taking 
all these factors into consideration I calculate that the net sum 
which the United States pays to other countries for the transporta- 
tion of merchandise is about $25,000,000 per annum. Payment of 
this sum has also to be remitted to other lands by exports of produce. 

VII. INSURANCE 

A large amount of fire insurance is written each year in the United 
States by English and other offices and the sums payable to those 
offices in respect of insurance reaches a considerable figure. On the 
other hand, the fire losses of foreign offices in the United States are 
heavy and the profit which alone accrues to other countries is not a 
large item ; at any rate it has not been a large item in the recent past. 
On the other hand, American life-assurance offices transact a fairly 
large business in foreign countries. Here again the claims have to be 
placed against the premiums received and the net sum coming to the 
United States is not an important item. In recent years the experi- 
ence of American life offices has been abnormal. They have trans- 
acted very little new foreign business and their claims have represented 
a much larger proportion of their premium income than usual. Still, 
this situation will doubtless pass away and America will receive the 
normal amount of income from the business transacted in other lands 
by her life-insurance offices. On balance, if all kinds of insurance and 
assurance are combined, America probably has to pay very little on 
balance to other lands and the factor of insurance in calculating the 
trade balance may consequently be ignored. 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 557 

VIII. SUMMARY OF REMITTANCES FOR INTEREST, TOURIST EXPENDI- 
TURES, GIFTS TO FRIENDS, AND FREIGHT CHARGES 

Thus I arrive at the conclusion that the United States have on 
balance to pay other countries a net sum of $250,000,000 for interest 
upon foreign capital invested with them; that the expenditures of 
American citizens in other lands exceed by $170,000,000 the outlays 
of foreign tourists in the United States ; that the remittances of foreign- 
born citizens to friends in Europe and elsewhere amount to $150,000,- 
000, and that the net sum paid for ocean freight to other countries is 
$25,000,000. In other words, the exports of merchandise, gold, and 
silver from the United States must exceed the aggregate value of the 
merchandise, gold, and silver imported by nearly $600,000,000 in order 
that payment may be made for interest, tourist expenditures, etc. 
That is to say, America requires an excess of exports over imports 
of nearly $600,000,000 per annum in order to settle her trade balance. 
If she has a larger balance of exports over imports than this figure, she 
is repaying a portion of her obligations to other lands. If she has less 
than this sum, she is borrowing additional capital from other lands. 
It should, however, be clearly understood that this amount is subject 
to wide fluctuations, and is by no means a hard-and-fast obligation. 
The interest upon foreign capital invested in the country fluctuates 
to some extent with the rate of dividend earned upon the capital 
invested. If the country is in depression, the rate of dividend on much 
of the capital declines, and if the nation is prosperous it advances. 
The figure given is calculated upon the return upon capital in recent 
years. Again, the tourist expenditures vary widely. In years of 
trade activity and prosperity American visitors to Europe and other 
coimtries spend money freely, whereas in years of depression they are 
more economical. Further, the gifts of American citizens to their 
friends in Europe fluctuate with the condition of trade. In a period 
of depression the gifts are appreciably smaller than in years of activity. 
In this respect, however, it should be noted that depression in trade 
causes a great many persons to return to Europe; that these persons 
take with them large sums of money, and that this outflow of money has 
to be placed against the smaller gifts to friends at such times. Taking 
all these circumstances into account, I calculate that in a year of 
depression the obligation of the United States to other countries 
for interest, tourist expenditures, remittances to friends, freight, etc., 
is about $500,000,000 and that in years of normal trade activity it is 
about $600,000,000. 



5S8 MATERIx\LS FOR ELEMENTARY ECONOMICS 

Perhaps the situation will be more clearly realized if I set it out in 
tabular form: 

Foreign Trade of the United States, 1908-9 

Merchandise: 
Exports — 
Domestic. $1,638,000,000 
Foreign... 25,000,000 



Total. . . $1,663,000,000 

Imports 1,312,000,000 



Excess of merchandise exports over imports. $351 ,000,000 



Gold: 



Exports $92,000,000 

Imports 44,000,000 



Excess of gold exports over imports 48,000,000 

Silver: 

Exports $56,000,000 

Imports 44,000,000 



Excess of silver exports over imports 12,000,000 



Total excess of merchandise, gold, and silver exports over 

imports $41 1,000,000 

Remittances for interest, etc.: 

Interest $250,000,000 

Tourist expenditures 170,000,000 

Remittances to friends 1 50,000,000 

Freight 25,000,000 



Total remittances 595,000,000 



Excess of sum remitted for interest, tourists, to friends, 

and for freights, over trade balance $184,000,000 

This balance of $184,000,000 has been liquidated by permanent 
or temporary investments of capital by other countries in the United 
States. 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 559 

163. THE BALANCE OF TRADE AND GOLD SHIPMENTS" 

About midday, on Monday, a wagon backed up to the steps of 
the Assay Office, the most antiquated building on Wall Street, and 
out jumped a couple of men who were joined by others from inside 
the building. A plank was run out, up to the door, along which, in 
rapid succession, forty kegs were rolled into the wagon, each numbered 
and stenciled with the letters "L. F." and duly recorded by a clerk 
who stood by. When all were aboard, the plank was drawn in and 
away rolled $2,000,000 in gold bars, for export to France. 

Thus one saw, in the simple operation, the practical working-out 
of an international movement of credits, brought down to its ultimate 
settlement. As many watched the operation, someone remarked: 
"Is it not a strange thing that, notwithstanding the efficiency to 
which modern banking has been brought, in the last resort we must 
make remittance in this cumbersome manner, by shipping gold ? 
This operation we are seeing now is exactly the same as was done a 
hundred years ago. It is a primitive way of settling debts, and yet, 
so long as gold maintains its pre-eminent place as a standard of 
money, it must ever remain the only way of settling international 
balances in their final stage." 

164. COMMERCIAL CREDITS IN THE FINANCING OF 
IMPORTS AND EXPORTS^ 

Broadly speaking, commercial credits are of two classes — those 
issued to facilitate the import of merchandise and those issued to 
facilitate its export. Considering the question from the standpoint 
of New York, import credits are so much more important than 
export credits and issued in so much larger volume, they will be 
taken up first. 

Not all the merchandise imported into the United States is brought 
in under commercial letters of credit, but that is coming to be more 
and more the way in which payment for imports is being arranged. 
Formerly an importer who had bought silk or white-goods in France 
went around to his banker, bought a draft on Paris for the required 
amount of francs and sent that over in payment. In some cases that 
is still the method by which payment is made, but in the very great 

' From The Wall Street Journal, February 9, 191 2. 

^ Adapted from Franklin Escher, Elements of Foreign Exchange, chap. ix. 
The Bankers Publishing Co., 1910. 



56o MATERIALS FOR ELEMENTARY ECONOMICS 

majority of cases where business is being run on an up-to-date basis, 
a commercial letter of credit is arranged for before the importation 
is made. Of how great advantage such an arrangement is to the 
merchant importing goods the following practical illustration of how 
a "credit" works will show. 

To exemplify the greatest number of points of importance possible 
in connection with the commercial credit business, the case of a 
shipment of raw silk from China will, perhaps, serve best. A silk 
manufacturer in Paterson, New Jersey, we will assume, has purchased 
by cable ten bales of raw silk in Canton, China. 

The purchase of the silk having been consummated by cable, the 
first thing the purchaser would do would be to go to his banker in 
New York, lay before him an exact statement of the conditions under 
which the purchase was made, and get him (the banker) to open a 
commercial letter of credit covering those terms. Such a credit, of 
which a reprint is given herewith, would be in the form of a letter to 
the issuing banker's London correspondent, requesting him to 
"accept" the drafts of the sellers of the silk in Canton up to a certain 
amount and under certain conditions. These conditions are all 
very fully set forth in the letter of credit itself. 

The silk importer having received this letter of credit from the 
banker in New York, sends it by first mail (or, if the case be urgent, 
cables its contents) to the seller of the silk out in Canton. The 
latter, having received it, is then in a position to go ahead with his 
shipment. The first thing he does is to put the silk aboard ship, 
receiving from the steamship company a receipt (bill of lading) 
stating that the ten bales have been put aboard, and making them 
deliverable to the order of the hanker in New York, who issues the credit. 
The bill of lading being made out to his order is useless to anybody 
else. He and he only can get the silk out of the ship when it arrives 
in New York. 

The shipper in Canton having received this bill of lading from the 
steamship company and having properly insured the goods and 
received a certificate stating that he has done so, is then in a position 
to go ahead and draw his draft for the cost of the silk. The London 
correspondent of the New York banker, to whom the letter of credit 
is addressed, is, say, the Guaranty Trust Company, London. Upon 
that institution the Canton silk firm, therefore, draws his draft in 
pounds sterling for the cost of the silk, attaching to the draft the bill 
of lading, an invoice, and the insurance certificate. 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 561 

A pertinent inquiry at this point is as to why the letter of credit 
for silk shipped from a city in China directs that drafts be drawn on 
London — as to why London figures in the transaction at all ? The 
answer is that drafts on London are always readily negotiable, and 



Credit No. 1301 {Copy) 

£600 Sterling 

GUARANTY TRUST COMPANY OF NEW YORK 

New York, October 19, 1909 
To the Guaranty Trust Company, 
7,2, Lombard Street, London. 

Gentlemen: At the request and for account of The Silk Manu- 
facturing Co., Paterson, we hereby authorize Smith & Jones, Canton, 
China, or any other parties whose drafts you may be directed by 
their written order, or by us, to accept under this credit, to value on 
you at 4 months' sight for any sum or sums, not exceeding in all Six 
hundred Pounds Sterling (say £600 Sterling) to be used as they 

may direct for invoice cost of 10 bales raw 

silk to be purchased for account of and to be 

shipped to a Pacific port in the United States 

The Bills must be drawn in Canton, China, prior to the first day 
of June, 1910 and advice thereof given to you in original and dupKcate, 
such advice to be accompanied by Bill of Lading filled up to order of 
the Guaranty Trust Company of New York (with copy of invoice) 
for the property shipped as above. All the Bills of Lading issued, 
except one sent to us by the vessel carrying the cargo, and one retained 
by the captain of the said vessel, are to be forwarded direct to you. 
Copy of invoice, properly certified by the U.S. Consul, to be forwarded 
to us by the vessel, also advice of each Bill drawn. 

And we hereby agree with the drawers, indorsers, and bona fide 
holders of Bills drawn under and in compliance with this credit, that 
the same shall be duly honored on presentation at your ofiice in London. 

We are. Gentlemen, 

Your obedient servants, 
Guaranty Trust Company or New York 
N.B. Bills drawn under this credit must be marked Drawn 
under Guaranty Trust Company of New York 
Letter of Credit No. 1301 dated October 19, 1909 
for £600 
Insurance in order at Canton 



Form of Commercial Letter of Credit 

that London is the only city in the whole world drafts on which are 
readily negotiable in all places and at all times. 

Assume now that the silk has been put aboard ship bound for the 
United States, that the shipper has drawn, say, a draft for £1,000 at 
four months' sight on the Guaranty Trust Co., London, and has 



562 MATERIALS FOR ELEMENTARY ECONOMICS 

attached thereto the bill of lading and the insurance certificate. Tak- 
ing this draft around to his bank the shipper sells it for local currency 
at the then prevailing rate for four months' sight drafts drawn on 
London. The fact that it is drawn at four months' sight means 
that he will get a lower rate of exchange for it than if it were drawn 
payable on demand, but that was the arrangement with the buyer 
in New York — that the drafts against the silk were to have four 
months to run. The shipper of the silk is now out of the transaction. 

Long before the silk gets to New York the draft will have reached 
London and will have been presented to the cashier of the Guaranty 
Trust Co., who, of course, was apprised of the credit opened on his 
bank at the time such credit was originally issued. Examining the 
draft and the documents carefully to see that they conform with the 
terms of the credit, the cashier of the Guaranty Trust Co., London, 
formally "accepts" the draft, marking it payable four months from 
the date it was presented to him. The accepted draft he hands back 
to the messenger of the bank who brought it in; the bill of lading, 
insurance certificate, and invoice he keeps. By the next mail steamer 
he dispatches these papers to the banker in New York who issued the 
credit. 

For the time being, at least, that is to say, till the accepted draft 
comes due, the London banker is out of the transaction, which is 
now narrowed down to the importer of the silk in Paterson and the 
banker in New York who issued him the credit. 

Assume now that a week has passed and that the New York banker 
finds himself in possession of a bill of lading for ten bales of silk, mer- 
chandise deliverable to his order. A few days later, perhaps, the 
goods arrive overland by fast freight from Seattle. The Paterson 
silk manufacturer, who is eagerly awaiting their arrival, comes around 
to the banker: "Indorse over the bill of lading to me," he says, 
"so that I can get the silk and start manufacturing it." 

If the banker does it, he will be giving over the only security he 
has for the payment at maturity of the draft his London correspondent 
accepted, and for which he himself is responsible. Still, the manu- 
facturer has to have his silk. 

A number of different agreements exist between bankers and 
importers to whom the bankers issue credits, as to the terms on which 
the importers are to be allowed to take possession of the merchandise 
when it arrives here. Sometimes the goods are put into store and 
handed over to the merchant only when he shows that he has sold them 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 563 

and needs them to make delivery. Sometimes they are warehoused 
at once, and parceled out to the importer only in small lots, as he needs 
them. But more often the goods are delivered over to the importer on 
his signing one form or other of what is known as a "trust receipt." 
This document is simply a pledge on the part of the importer to hold 
the merchandise in trust for the banker and, as the merchandise is 
sold, to hand over the proceeds to apply against the draft drawn by 
the shipper of the goods. The theory of the thing is that by the time 
all the merchandise has been sold more than enough money will have 
been handed over to the New York banker to take care of the draft 
accepted by his London correspondent, the excess constituting the 
importer's profit. 

The kind of trust receipt under which bankers are willing to give 
over the merchandise (the only collateral they have) naturally varies 
according to the standing of the house in question. 

Returning now to the particular transaction in question, the point 
has been reached where the silk is in the importer's hands, that result 
having been accomplished without the importer having put up a cent 
of money. Moreover, for nearly four months to come there will be 
no necessity of the importer's putting up any money (unless he should 
sell some of the silk, in which case he is bound to turn over the money 
to the New York banker as a "prepayment"). But in the ordinary 
course of events the importer of the silk has nearly the four full months 
in which to fabricate the goods and sell them. At the end of that 
time the draft drawn by the firm in Canton and accepted by the 
Guaranty Trust Co., London, will be coming due, and the silk importer 
will be under the necessity of remitting funds to meet it. Twelve 
days before the actual maturity of the £1,000 draft in London, the 
New York banker will send to the manufacturer in Paterson a mem- 
orandum for £1,000 at, say, 4.86 (whatever is the current rate) 
plus commission. The silk firm pays in dollars; the New York 
banker uses the dollars to buy a demand draft for £1,000; a day or 
two before the four months' sight draft comes due in London this 
demand draft ("cover") is received in London from New York, and 
the whole operation is closed. 

It has been deemed advisable to set forth the whole course of one 
of these import-financing transactions, in order that each successive 
step may be clearly understood. The question of just why this credit 
business is worked as it is will now be taken up. 

The whole purpose of the business, it is plain enough, is to give 



564 MATERIALS FOR ELEMENTARY ECONOMICS 

the importer here a chance to bring in goods without putting up any 
actual money — in other words, of letting him use a larger capital 
than he is actually possessed of. 

What does the seller of the goods get out of it ? Payment for his 
goods as soon as he is ready to ship them. No waiting for a remit- 
tance, no drawing of a dollar-draft on an obscure firm in Paterson,N.J., 
which no Canton bank will be willing to buy at any price. From the 
shipper's standpoint, surely a most satisfactory arrangement and one 
which will induce him to quote the very best price for merchandise. 

As to the banker's part in the transaction, the whole question is 
one of commission. The London banker on whom the credit is issued 
gets a commission from the American banker for "accepting" the 
drafts, and the American banker, of course, gets a substantial com- 
mission from the party to whom the credit is issued. Sometimes the 
banker in New York and the banker in London work on joint-account, 
in which case both risk and commissions are equally divided. But 
more often, perhaps, the London bank gets such-and-such a fixed 
commission for accepting drafts drawn under credits, and the New 
York banker keeps the rest of what he makes out of the importer. 

It is well to note the fact that in those commercial credit trans- 
actions neither banker is ever under the necessity of putting up a cent 
of actual money. As in the case of foreign loans previously described, 
the banker's credit and the banker's credit only is the basis of the 
whole operation. The London bank never pays out any actual cash — 
it merely "accepts^' a four months' sight draft, knowing that before 
the draft comes due and is presented at its wicket for payment, " cover" 
will have been provided from New York. The New York banker, 
on the other hand, merely sends over on account of the maturing 
draft in London the money he receives from the importer. He is 
under an obligation to the London banker to see that the whole 
£1,000 is paid ofif before the four months are over, but he knows the 
party to whom he issued the credit, and knows that before that time 
all the silk will have been manufactured and sold and the proceeds 
turned over to him. At no time is he out of any actual cash. 

For purposes of illustration, the financing of the import of silk 
from China was chosen because the operation embodied perhaps more 
points of interest in connection with commercial credit business than 
any other one operation. Commercial credit operations, however, 
are of great variety and scope. They may involve, for instance, the 
import of matting shipped from Japan on slow sailing ships and where 
the drafts drawn run for six months or more, or they may involve the 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 565 

import of dress goods from France, in which case the drafts are often 
at sight. Furthermore, all credits are by no means issued on London. 
In the Far East, where tea or shellac or silk is being exported to the 
United States, London is known as the one great commercial and 
financial center, but in the case of dress goods shipped from Marseilles 
or Lyons, for instance, the credits would invariably stipulate that 
the drafts be drawn in francs on Paris. 

But whether the material imported be dress goods from France 
or tea from China, the principle of the commercial credits under which 
the goods are brought in remains identically the same. In every case 
there is a buyer on this end who wants to get possession of the goods 
without having to put up any money, and in every case there is a 
seller on the other end who wants to receive payment as soon as he 
lets the merchandise get out of his hands. The banker issuing the 
credit is merely the intermediary, and the naming of some foreign 
point on which the drafts are to be drawn is merely incidental to the 
conduct of the operation. 

One last point remains to be cleared up. The seller of the goods 
in the silk-importing operation described gets actual money for the 
goods as soon as he ships them — where does this actual money come 
from? In the last analysis, from the discount market in London, 
from the man in London who discounts the draft after it has been 
"accepted." The exporter in Canton gets the money direct from his 
banker in Canton, but the latter is wiUing to let him have the money 
in exchange for the draft only because he (the banker) knows that he 
can send the draft to London and that some one there will eagerly 
discount it. In that way the Canton banker gets his money back. 
The only party who is out of any money during the time the silk is 
being manufactured and sold in Paterson, N.J., is the party in London 
who has discounted the shipper's draft. 

The real function of the banker, then, in these Commercial Credit 
transactions, is to open up the international loaning market to the 
importer. Through the system now in force this is accompHshed by a 
banker in New York issuing a credit and by a banker in London put- 
ting his "acceptance" on drafts drawn under that credit. The 
combination makes the drafts good; makes the great discount market 
in London willing to take them, and absorb them, and advance real 
money on them. And for the opening up of this great reservoir of 
capital the importer here has to pay an interest rate of but from one 
to two per cent per annum. Naturally the business has grown to 
tremendous proportions. 



566 MATERIALS FOR ELEMENTARY ECONOMICS 

165. A DOCUMENTARY COMMERCIAL LONG BILL 



No. 167. FIRST 


£500. New York, January 19, 191 1 


Sixty days after sight of this first exchange (second being un- 


paid) pay to the order of the Y National Bank of New York Five 


Hundred Pounds Sterling. 


Value received. Charge to the account of 


(2500 bu. wheat by s.s. "Western") X 


To Z Bank 


London, England 



X has sold the wheat to a person in England and has drawn on the 
bank designated by the buyer. X will probably attach to this bill 
the bill of lading of the transportation company, the insurance cer- 
tificate of the insurance company and, sometimes, a hypothecation 
slip giving the purchaser of the bill of exchange a right to the goods 
shipped. Probably X will now sell the bill to some banker at the 
current rate of exchange. The banker will send it to his correspond- 
ent in England who will present it for "acceptance." The bill may 
then be held until maturity or may be sold in the open market. If 
this bill had not had the shipping documents, etc., attached to it, it 
would have been called a "clean bill." Clean bills are obviously not 
so well secured as documentary bills. The changes in the above form 
which would be necessary to make it a "demand bill," or a "bill 
drawn against securities," or a "banker's demand draft," or a 
"banker's long draft" are obvious. 



166. THE PAR OF EXCHANGE AND APPROXIMATE GOLD 

POINTS 

London 



Name of Center 


Par 


Gold-importing 
Point 


Gold-exporting 
Point 


Berlin 


20.43°- 
12.107'' 
4.866" 
25.225'* 


20.53 

12.17 

4.88 

25-34 


20.32 


Amsterdam 


12.02 


New York 


4.84 


Paris 


25.12! 







» Marks per pound sterling 
b Florins per pound sterling 



c Dollars per pound sterling 
■1 Francs per pound sterling 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 567 
Paris 



London 

Berlin 


25 
123 

518 
208 


225d 

46« 
26f 
328 






25 

122 

515 
207 


I2| 
90 

75 
16 


25 
124 

523 
210 


34 
14 
OS 
16 


New York 


Amsterdam 


New York 


London 

Paris 

Berlin 


4 

5 

95 


866« 
182'' 

28i 






4 

5 
94 


84 

23 
50 


4 

5 

96 


88 
16 

25 




Berlin 


London 

Paris 

New York 


20 

81 

419 

168 


43" 

791 

• 74" 






20 
80 

415 
168 


33 
56 
25 
25 


20 
81 

423 
170 


53 
37 
30 
50 


Amsterdam 


• Marks per 
<: Dollars pei 
<• Francs per 
« Francs per 
' Francs per 
« Francs per 


pound sterling 
pound sterling 
pound sterling 
hundred marks 
hundred dollars 
hundred florins 






hFn 
iCe 

kMa 
iMe 

>Ma 


mcs 

Its 

rks 

irks 

irks 


per dollar 
3er four marks 
per hundred fran 
per hundred doll 
per hundred flori 


:s 
irs 

ns 





167. FOREIGN EXCHANGE TRANSACTIONS' 

Among the various transactions which may properly be termed 
foreign exchange are the following: the issuing of a money order, 
draft, check, or bill of exchange payable in a foreign country; the 
shipping of currency or coin from one country to another; an order, 
either written or cabled (telegraphed), to have a certain sum of money 
paid in a foreign country; a draft payable in a foreign country drawn 
for the value of goods exported; a draft, money order, check, or bill 
of exchange drawn in a foreign country payable in this country; 
the buying or selling of foreign currency or coin, whether here or 
abroad; a circular letter of credit, commercial or mercantile letter of 
credit, circular note, travelers' cheque, or other forms used either 
for obtaining money or credit in a foreign country. 

' From Howard K. Brooks, Foreign Exchange Text Book, pp. 1-2. The Author, 
1906. 



568 MATERIALS FOR ELEMENTARY ECONOMICS 

1 68. FOREIGN EXCHANGE QUOTATIONS' 

Quotations on foreign exchange, as they appear in the financial 
columns of our leading daily newspapers and in weekly financial 
publications, are seldom understood except by those very familiar 
with the business. Although almost every newspaper has a different 
way of quoting the rates, some more complete than others, the follow- 
ing, which is a facsimile of a clipping from a daily paper, is given for 
illustration and explanation by reason of its completeness: 

Foreign Exchange 

Sterling was firm with bankers' 6o-day bills quoted at i of a cent, 
cheques 5, and cables 10 points above Friday's close. Rates for actual 
business follow: 

Bankers', 60 days 4. 84I (§4. 845 

Bankers', sight , 4. 869S@4. 87 

Cable transfers 4.873S@4.8740 

Documents for payment 4-848 @4- 84! 

Ninety days on bankers 4- 82^ (§4. 82! 

Commercial sight 4. 8685@4. 8690 

Continentals were less active, virtually unchanged. Bankers' sight 
francs closed at 5.i6j@s.i6j plus -3V; marks, 95! less A ©951; 
guilders, 40I less -3\@4of- 

Following were the posted rates of the leading drawers of foreign 
exchange : 

Sterling 4. 88 

Paris, francs 5.15 

Berlin, reichsmarks 9Sf 

Amsterdam, florins 40I 

Antwerp, francs 5 • i Sf 

Genoa, lire 5 • i sf 

Zurich, francs ■ 5 • i Sf 

Vienna, kronen 20 . 40 

Stockholm, kronors 26 . 90 

St. Petersburg, rubles Si • 7° 

"Firm" means a good demand with prices tending upward. 

"Steady" would mean a fair demand with prices likely to remain 
stationary. 

"Strong" would mean a large demand with prices certain to go 
higher. 

'From Howard K. Brooks, Foreign Exchange Text Book, pp, 1 16-19. The 
Author, 1906. 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 569 

"Dull or weak" would mean very little or no demand with prices 
tending lower. 

"Bankers' 60 days": This quotation is for bankers' drafts 
drawn in pounds sterling upon (or payable by) a bank in London, 
60 days after sight or after acceptance by the paying bank. The 
rates 4 . 84I to 4 . 84^ mean per pound sterling. 

"Bankers' sight": A bankers' draft for a sum in pounds sterling 
upon a bank in London, payable at sight or upon demand. The 
rates $4.8695 to $4.87 mean per pound sterling. 

"Cable transfers": Where the money (pound sterling) is paid 
abroad (London) upon an order sent by cable. The amount would 
be paid in London immediately upon receipt of cable instructions, 
usually within a few hours. 

"Documents for payment": This refers to commercial bills of 
exchange with documents (bill of lading and insurance certificate 
attached to draft), drawn against an export shipment, the words 
" for payment " meaning that the draft must be paid before documents 
are given up, thus insuring payment before delivery of goods. If 
"documents" were for acceptance the documents would be delivered 
when draft was accepted by person upon whom drawn (called 
"drawee"), thus enabling drawee to obtain goods before payment 
of draft. This quotation refers to drafts drawn in pounds sterling, 
drawn payable 60 days after sight (acceptance). The rates quoted 
are per pound sterling. 

"Ninety days on bankers": Means drafts drawn by either banks 
or merchants (exporters) in pounds sterling upon (payable by) a 
bank, 90 days after the draft is accepted by bank upon which drawn. 

"Commercial sight": Drafts drawn by merchants (exporters) 
payable at sight against balances in a bank abroad which may have 
accumulated through sale of merchandise exported. 

"Continentals were less active, virtually unchanged": This 
refers to bills of exchange and drafts upon cities or countries of 
Europe, other than Great Britain. 

"Bankers' sight francs": This refers to drafts drawn by bankers 
in money of France (francs) payable by a bank, presumably at 
Paris. The quotation 5.165 to 5.16I plus -^-^ is for francs per 
$1 .00. The quotations for marks are for 4 marks on Germany, and 
those for guilders are on Holland, per guilder or gulden, or florin. 

"Posted rates": The quotations given as posted rates mean 
rates at which leading sellers of exchange were selling over their 



570 MATERIALS FOR ELEMENTARY ECONOMICS 

counter to customers, while the preceding rates in the above cHpping 
refer to rates at which bankers bought the exchange, or in other 
words, "buying rates." 

"SterHng": This quotation is for sight drafts drawn in the 
money of England, pounds sterling. 

"Paris, francs": Drafts or checks drawn in French francs 
payable only at Paris. The rate is per $i .00. 

"Berlin, reichsmarks, demand": A draft drawn payable at 
Berlin, Germany, in marks. The rate is for 4 marks. 

"Amsterdam, florins": Demand checks or drafts on Amsterdam, 
Holland, drawn in money of Holland, florins or guilders (or gulden) 
(different nomenclature of same money). The rate is per gulden. 

"Antwerp, francs": This is a quotation for 5 francs 15I centimes 
per $1 . GO for demand drafts drawn payable at Antwerp, Belgium. 
This country has the same monetary system as France, with coins 
of same name. 

"Genoa, lire": This quotation means that for a demand check 
or draft on Genoa, Italy, you would have to pay at rate of 5 lire 
15I centesimi per $1 .00. 

"Zurich, francs": For demand checks and drafts payable at 
Zurich, Switzerland, you would be allowed 5 francs 15I centimes for 
each $1 . 00. 

"Vienna, kronen": For demand checks or drafts on Vienna, 
Austria. The rate quoted is 20.40 [cents] per krone, the money of 
Austria. 

"Stockholm, kronors": For demand checks and drafts on Stock- 
holm, Sweden. The rate is 26.90 cents per kronor, the money of 
Norway, Sweden, and Denmark. 

"St. Petersburg, rubles": For demand checks and drafts on 
St. Petersburg, Russia. The rate is 51 . 70 cents per ruble, the money 
of Russia. 

169. THE FOREIGN EXCHANGE MARKET^ 

The foreign exchange market is in every sense "open" — anyone 
with bills to buy or sell and whose credit is all right can enter it and 
do business on a par with anyone else. There is no place where the 
trading is done, no membership, license, or anything of the kind. The 

' Adapted from Franklin Escher, Elements of Foreign Exchange, chaps, ii, 
iii, and v. The Bankers Publishing Co., 1910. 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 571 

"market," in fact, exists in name only; it is really constituted of a 
number of banks, dealers, and brokers, with offices in the same section 
of the city, and who do business indiscriminately among themselves — 
sometimes personally, sometimes by telephone, by messenger, or by 
the aid of the continuously circulating exchange brokers. 

The system is about as follows: The larger banks and banking 
houses have a foreign exchange manager, or partner, taking care of 
that part of the business, whose office is usually so situated as to 
make him accessible to the brokers who come in from the outside, 
and whose telephoning and wiring facilities are very complete. These 
larger houses have no brokers or "outside" men in their employ. 
The manager knows very well that plenty of chance to do business, 
buying or selling, will be brought in to him by the brokers and that 
his wires keep him constantly in touch with his fellow bankers. 

Next come the big dealers in exchange, some of whom do a regular 
exchange business of their own, the same as the bankers, but who also 
have men out on the street " trading " between large buyers and sellers 
of bills. Such houses are necessarily closely in touch with banks, 
bankers, exporters, and importers all over the country, and have 
always large orders on hand to buy and sell exchange. Some of the 
bills they handle they buy and use for the conduct of their own busi- 
ness with banks abroad, but the more important part of what they 
do is to deal in foreign exchange among the banks. They are known 
as always having on hand for sale large lines of commercial and 
bankers' bills, while on the other hand they are always ready to 
buy, at the right price. 

After this class of houses come the regular brokers — the independ- 
ent and unattached individuals who spend their time trying to bring 
buyer and seller together, and make a commission out of doing it. 
In a market like New York the number of exchange brokers is very 
large. Like bond-brokerage, the business requires little in the way 
of office facilities or capital, and is attractive to a good many persons 
who are willing to accept the small income to be made out of it in 
return for being in a business where they are independent. 

There being no regular market in which foreign exchange rates 
are made, it follows that the establishment of rates each morning and 
during the cquise of each day will be according to the supply and 
demand for bills. Rates are constantly changing, and changing at 
times almost from minute to minute. Yet so complete is the system 
of telephones and brokers that any exchange manager can tell just 
about what is taking place in any other part of the market. As to 



572 MATERIALS FOR ELEMENTARY ECONOMICS 

the actual fluctuation of exchange, while it is true that rates at times 
rise and fall with all the violence so often displayed in the security 
markets, most of the time they move within a comparatively narrow 
range. On an ordinary business day, for instance, the change is not 
apt to run over fifteen points (15-100 of a cent per pound). 

As to the relative importance of the different kinds of exchange, 
sterling, of course, occupies the most prominent position. What 
proportion of the total of exchange dealt in in the New York market 
consists of sterling it is impossible to determine, but that it is as great 
as the volume of all the other kinds of exchange put together can 
safely be said. Many big dealers, indeed, make a specialty of sterling, 
and if they handle any other bills at all, do so only on a very small 
scale. As to whether francs or marks come next in volume, there is a 
difiference of opinion. These are the three great classes of exchange 
and are the basis of at least nine-tenths of all foreign exchange opera- 
tions. 

Turning now to consideration of the various sources from which 
springs the demand for foreign exchange, it appears that they can be 
divided about as follows: 

1. The need for exchange with which to pay for imports of mer- 
chandise. 

2. The need for exchange with which to pay for securities (Ameri- 
can or foreign) purchased by us in Europe. 

3. The necessity of remitting abroad the interest and dividends 
on the huge sums of foreign capital invested here. 

4. The necessity of remitting abroad freight and insurance money 
earned here by foreign companies. 

5. Money to cover American tourists' disbursements and expenses 
of wealthy Americans living abroad. 

6. The need for exchange with which to pay off maturing foreign 
short-loans and finance-bills. 

7. Coming to maturity of issues of American bonds held abroad. 
Where some especially large issue runs off without being funded 
with new bonds, demand for exchange often becomes very strong. 
Especially is this the case with the short-term issues of the railroads 
and most especially with New York City revenue warrants which have 
become so exceedingly popular a form of investment among the 
foreign bankers. 

8. Low money rates here, which result in a demand for exchange 
with which to send banking capital out of the country. 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 573 

9. High money rates at some foreign center which create a great 
demand for exchange drawn on that center. 

The causes which make up for low rates must necessarily be, to a 
certain extent, merely the converse, but for the sake of clearness they 
are set down. The division is about as follows: 

1. Especially heavy exports of merchandise. Exports continue 
on a certain scale all through the year, but are heavier at some times 
than others. 

From the middle of August, when the first of the new cotton crop 
begins to find its way to the seaport, until the middle of December, 
when the bulk of the corn and wheat crop exports have been completed, 
exchange in very great volume finds its way into the New York market. 
Normally this is the season of low rates. 

2. Large purchases of our stocks by the foreigners and the placing 
abroad of blocks of American bonds. 

3. Distrust on our part of financial conditions existing at some 
point abroad where there are carried large deposits of American 
capital. In the everyday life of the exchange market, political 
development of an unfavorable character and war rumors are about 
the most frequent and potent influences toward the condition of 
uneasiness above referred to. Few war rumors ever come to anything, 
but there are times when they circulate with astonishing frequency 
and persistence and cause decided uneasiness concerning financial 
conditions at important points. At such times bankers having money 
on deposit at those points are apt to become influenced by the drift 
of sentiment and to draw down their balances. Here, again, operg.- 
tors in exchange, keenly on the alert for such chances, will very likely 
begin to sell the exchange market short and often succeed in breaking 
it to a degree entirely unwarranted by the known facts. 

4. High money rates here. 

5. Unprofitably low loaning rates at some important foreign center 
where American bankers ordinarily carry large balances on deposit. 

These are the main influences bearing on the fluctuation of 
exchange. Needless to say they are not exerted all one way, or one 
at a time, as set forth. The international money markets are a most 
decidedly complex proposition, and there is literally never a time 
when several influences tending to put rates up are not conflicting 
with several influences tending to put rates down. The actual 
movement of the rate represents the relative strength of the two sets 
of influences. 



574 MATERIALS FOR ELEME-NTARY ECONOMICS 

170. FACTORS AFFECTING THE RATES OF FOREIGN 
EXCHANGE 

The fluctuations in sterling exchange last week' were not impor- 
tant, but such changes as actually occurred were dominated mainly 
by the course of the international money markets. There has been 
a decided easing-up in nearly all of the world's leading financial 
centers, the March quarterly settlements having been completed 
without the acute disturbances that were feared only a short time 
ago. The European political situation has also been cleared to a 
considerable extent, although the defiance of the wishes of the powers 
by Montenegro militates against a complete restoration of confidence. 
The position of the European banks last week was watched with 
more active interest than on any previous occasion for quite a while. 
The strain upon their resources for the March quarterly settlements 
was very severe, but they came out of it with better results than were 
anticipated. 

The Bank of England, which, after all, is the great leader of 
European finance, did extremely well under the circumstances. 
While it lost $5,000,000 in total reserve and $1,200,000 in bullion, it 
was enabled to decrease loans $24,700,000 and thereby raise its 
percentage of reserve to 41 .85, which is over 2 per cent better than 
in either 1912 or 1911. The Bank of France made an actual gain 
in gold of $2,133,000, but, in order to tide over the settlements, had 
to expand its note circulation $51,990,000 and its loans $31,745,000. 
The Bank of Germany was under greater pressure than any of the 
other big institutions. The bank suffered a decrease in its stock of 
gold and silver of $15,994,000 and increased its note circulation in 
tKe enormous sum of $136,121,000 and its discounts $121,018,000. 
But poor as this showing was, it was better than expected, as the 
aggregate depreciation in its status was $20,750,000 less than in 191 2. 
Paris discounts remained at 4 per cent, but, as compared with a 
period just prior to the settlements, Berlin rates declined from 6 to 
4f per cent and English rates from 4I per cent to 4I per cent. These 
figures reflect in a striking way the easing-up in discounts abroad. 
There was some talk during the week about the Bank of England 
reducing its minimum rate, but it is highly probable that no such 
action will be taken until it is demonstrated that the German money 
markets are going to remain on an easier basis and also until the 
political atmosphere becomes still clearer. 

' From The Journal of Commerce and Commercial Bulletin, April 7, 1913. 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 575 

As is well known, there is a great congestion of securities at 
London, with constant solicitations for more capital, and this may 
assist in keeping the bank rate where it is for some time. What 
throws strong light upon the congestion of securities at London was 
the announcement on Saturday that only 6 per cent of the South 
African $20,000,000 loan was subscribed for, the large balance being 
left on the hands of the syndicate. The situation abroad of course 
caused a relaxation in the previous demand for exchange, particularly 
for cable transfers, and the market eased off to 4 . 87 for demand and 
4 . 8755 for cables, but soon rallied to 4 . 8720 and 4 . 8870, respectively. 
The rally, however, was not maintained. The recovery was due to 
the pronounced relaxation in money in the local market, where the 
renewals for call loans fell to 3! per cent and quotations for all maturi- 
ties to 4|@4f per cent. So it will be seen that the easing-up in money 
here and abroad worked somewhat at cross-purposes. 

Aside from the increased ease in money here, exchange was pre- 
vented from suffering any material decline through the continued 
scarcity of commercial bills. One important reason for the small 
supply of commercial exchange was the decreased exports of cotton 
from the United States. From the opening of the cotton year to 
the present time exports of the southern staple show a decrease of 
2,000,000 bales. As cotton is always relied upon to furnish a large 
volume of exchange for the country to liquidate its foreign indebted- 
ness and pile up a credit balance, it will be evident to all that this loss 
of 2,000,000 bales of cotton is a very significant matter. But the 
fact should not be lost sight of that there is still a considerable amount 
of cotton held in the South, and also that, with the easing-up in money 
abroad and the settlement of the Balkan question, exports are likely 
to increase in the future. Last week it became apparent that both 
English and Continental spinners were drawing freely upon accumu- 
lated supplies, and that stocks were being steadily reduced. These 
therefore must be replenished, and easier money will greatly facilitate 
replenishment. Grain is also likely to furnish an increased volume 
of exchange in the future. Farm reserves are unusually large; 
hence there will be a liberal amount of wheat, corn, and other cereals 
for shipment. Exports already are showing an increase. The outgo 
of wheat last week reached 4,000,000 bushels, an increase of 3,000,000 
bushels over the preceding week, while that of corn rose to nearly 
2,000,000 bushels, a gain of over 400,000 bushels. The opening of 
navigation will release a large amount of grain, which will be available 
for export. 



576 MATERIALS FOR ELEMENTARY ECONOMICS 

Closing rates were as follows: 

London — Bankers' 60 days 4. 8325@4. 8350 

Demand sterling 4. 87o5@4. 8710 

Cable transfers 4. 876o@4. 8765 

Demand, N.Y., in London 4- 88f @4. 88-,\ 



A decline of 30 to 35 points occurred in sterling exchange yester- 
day/ when demand bills sold as low as 4 . 8660, while cable transfers 
dropped to 4.8705. These are the lowest figures so far touched on 
the current downward movement. 

Among the circumstances that contributed to this end were 
easier English discounts and continued buying of stocks in this market 
by the foreigners, as well as the placing abroad of a portion of recent 
bond issues. The supply of bills consequently was larger than of 
late. Now that the fortnightly settlement at London is out of the 
way the difference between demand bills and cable transfers is less 
marked than hitherto. 

Final quotations for actual business were as follows: bankers' 
60 days, 4.8305 ©4.8315; bankers' sight, 4.8660 @ 4. 8665; cable 
transfers, 4 . 8705 @ 4 . 87 10 ; commercial 60 days, 4 . 83 ; commercial 
90 days, 4. 81 J. 

The movements in sterling exchange last week^ were more important 
than for some time, demand bills having risen close to 4.87 and cable 
transfers to 4.87I, the highest quotations in months. Underlying 
this sharp advance were several influences of moment. In the first 
place open market discounts at London advanced to 4I per cent on 
the spot, while the rate to arrive was 4I per cent, the official bank 
rate. The Bank of England showed the highest percentage of reserve 
in a series of years, but the bullion account was $15,000,000 below 
that of last year. Naturally under existing conditions no reduction 
was made in the rate. The difficulty of the English money market 
centered in the fact that Germany was not only a borrower in London, 
but took a round amount of gold in the open market, and also some 
German coin from the Bank of England. In addition, there were 
new demands for capital and considerable pressure from syndicates 
loaded with undigested securities. Firm money and discount rates 

' From The Journal oj Commerce and Coynmercial Bulletin, April 12, 1913. 
^ From The Journal of Commerce and Commercial Bulletin, June 9, 1913. 



INTERNATIONAL TRADE AND FOREIGN EXCHANGE 577 

prevail all over Europe, as there are still many big loans pending, 
the latest one in point being an effort on the part of Belgium to borrow 
over $100,000,000 in Paris. 

During the past week there was a fair demand to remit June 
interest and dividend money to Europe, and tourists' letters of 
credit again figured as a strengthening force. There were also the 
usual home returning immigrants, who in the aggregate take out a 
large amount of money in the course of the season. On the other 
hand, there was a reduction in the supply of commercial exchange, 
such as usually sets in about this time, when exports are on the 
wane. Last week exports of produce and merchandise from New 
York alone decreased $5,300,000, which, under the present conditions 
in the exchange market, was quite an important circumstance. Then 
the unsettled condition of the European security markets caused 
selling of stocks to New York to the extent of about 90,000 shares, 
which in itself was a matter of no mean importance. The sharp 
advance in time money rates here, with normal conditions abroad, 
would have led up to heavy lending of foreign capital and the conse- 
quent drawing of finance bills. But Europe has such financial 
troubles of its own at present that there was practically nothing 
doing in the way of placing capital in this market. 

The high range of exchange quotations brought about an export 
of $200,000 gold to Antwerp. This at once raises discussion as to 
the possibility of the resumption of shipments to Paris. As the 
situation stands the Bank of France could secure gold now cheaper 
than it did before, if it renewed former special inducements. 

Closing rates were as follows: 

London — Bankers' 60 days 4. 8285@4. 8295 

Demand Sterling 4 . 8675@4 . 8680 

Cable transfers ■ 4.87io@4.87iS 

Grain bills, 7 days 4 ■ 85^ 

Grain bills, 60 days 4 . 83! @ 4 . 83I 

Commercial, sight 4 . 86^ 

Demand, New York in London 4. 87! @ 4. 87 A 



XIII. TARIFF POLICY 

171. A SUMMARY OF THE TARIFF HISTORY OF THE 
UNITED STATES 

The first period, lySp-iSij: A tariff for revenue. — One of the chief 
causes leading to the adoption of our Constitution was the necessity 
of giving the federal government power to levy taxes and regulate 
foreign commerce. As the people of the country were very much 
opposed to taxation the easiest way to secure revenue was through the 
indirect method of customs duties. It was but natural, therefore, 
that the first act of Congress under the new Constitution should be the 
tariff of 1789. Specific duties were levied on about thirty commodi- 
ties, ad valorem rates of 7 J to 15 per cent were imposed on certain 
other articles, and 5 per cent on all articles not elsewhere specified. 
The average rate of duty was 8| per cent. Among the important 
duties were those on molasses, sugar, tea, coffee, wines and spirits, 
hemp, cordage, boots, leather, earthenware, glass, nails, iron, steel, and 
salt. The main purpose, as was to be expected, was revenue rather 
than protection and this is reflected in the act by the low rates of 
duty and the inclusion of such articles as sugar, coffee, tea, and wines, 
which nobody expected would be extensively produced in this country. 

During the next quarter-century the rates on various commodities 
were raised from time to time, but in nearly every case the immediate 
and most important cause was the need for more revenue, and such 
protection as was given was largely incidental. This continued 
through the War of 181 2, at the opening of which duties were doubled, 
thus raising the rate on many commodities to about 35 per cent. 
During most of this period, moreover, agriculture and foreign com- 
merce were particularly profitable and there was little incentive to 
enter upon new lines of manufacturing. The restrictions upon foreign 
commerce beginning with the orders and decrees of England and 
France and our own Embargo continued through the War of 181 2 and 
soon completely changed the whole situation. The supply of foreign 
manufactures being so completely cut off, the country was thrown back 
upon its own resources and forced to start in manufacturing for itself. 
Under this protection and stimulus a great variety of manufactures 
sprang up, many of the concerns being very inadequately equipped 
and managed. Then, when the close of the war in 181 5 let in a flood 

578 



TARIFF POLICY 579 

of foreign goods, a large portion of which sold at unusually low prices, 
the domestic manufacturer found himself in difficulties and at once 
sought protection through the tariff. 

The second period, 1816-1860: A low protective tariff. — As a result 
the country now entered upon a new period in its tariff history. 
Protection rather than revenue became the main objective and in 
consequence there was a distinct change both in the kind of commodi- 
ties protected and in the construction of the tariff duties. The pro- 
tective policy adopted at that time has been continued ever since 
but we can divide its history into two main periods with the Civil 
War as the dividing point, the first period being marked by a relatively 
low protective tariff and the second by a distinctly higher level of 
duties. The earlier period may be further subdivided into the years 
of rising duties culminating with the tariff of 1828 and the succeeding 
years of falling duties. 

The tariff of 1816, which marks the beginning of the new period, 
did not in most cases impose as high a rate of duty as had prevailed 
during the war, though higher than during the preceding years of 
peace. The articles protected and the method of levying the duties, 
however, show the distinctly protectionist form which the tariff then 
assumed. Duties of 25 per cent were placed on manufactures of 
cotton and wool, to be reduced to 20 per cent in 1819. In addition 
the minumum valuation on cotton cloth was to be 25 cents a square 
yard, thus giving a higher duty on the cheaper grades. A duty of 
30 per cent was placed on rolled or hammered iron, leather, and several 
other articles. 

Unusually severe competition from abroad coupled with industrial 
depression in this country led to a further increase in the tariff of 1818, 
which raised the duties on iron and postponed the reduction of the 
duties on cotton and woolen manufactures till 1826. Similar causes 
led to another effort to increase duties in 1820 and the bill failed by 
only one vote in the Senate. The advocates of protection were more 
successful in their next attempt when the tariff of 1824 brought 
another increase in duties, shared, among other articles, by wool, 
hemp, cutlery, lead, and manufactures of cotton, wool, silk, iron, 
hemp, and glass. The duty on the important grades of wool and 
cotton manufactures was 33I per cent and the minimum valuation 
clause was extended to woolens. The highest rates of duty reached 
during this period, however, came under the tariff of 1828. Woolen 
cloths were granted a duty of 45 per cent. Heavy duties were placed 



58o MATERIALS FOR ELEMENTARY ECONOMICS 

on hemp, flax, raw wool, molasses, and manufactures of iron. For 
purely political reasons many provisions objectionable to New England 
manufacturers were intentionally inserted by southern members in 
the hope that this would lead to the defeat of the bill. Nevertheless, 
it was finally accepted, though commonly spoken of as the tariff of 
abominations. 

This marks the end of the upward movement of duties during the 
period preceding i860. These years between 181 6 and 1830 also 
cover the most critical time in the history of our manufactures. The 
reasons for this are: (i) the country, theretofore almost exclusively 
given over to agriculture and commerce, was just beginning to develop 
manufactures; (2) technical processes in the leading industries were 
changing very rapidly; (3) capital and labor suited for the factory 
were still relatively scarce and markets were limited; (4) our manu- 
factures had developed rapidly under the almost absolute protection 
of the period of restricted commerce and now for the first time had 
to face competition from the more advanced manufactures of Europe; 
(5) owing to the great depression in EngHsh industry which occurred 
at this time such competition was especially severe and was felt the 
more since it was not a period of marked prosperity in this country. 

The remainder of the period of low protective tariff, covering the 
years from 1832 to i860, is marked by a general downward tendency 
in duties. The chief reasons for this appear to be: (i) the growing 
opposition of the South and its more dominant influence in public 
affairs; (2) the fact that by 1830 the manufactures had passed through 
the most critical period of growth and were sharing with the country 
in general the prosperity of the years immediately following 1830; 
(3) the favorable fiscal situation, the government debt having been 
entirely paid off by 1835, and the revenue in ordinary years, being 
more than adequate to meet expenses. 

The growing opposition to protection on the part of the South was 
indicated by the Nullification movement following the tariff of 1828. 
A slight concession was made in 1830 by the reduction of the duties 
on such revenue-producing articles as salt, molasses, coffee, and tea. 
This was followed by the more general reduction of the tariff of 1832 
which did away with the worst of the "abominations" and cut the 
duties to about the level of the tariff of 1824. The cut was carried 
much farther by the compromise tariff of 1833 which provided for a 
gradual reduction of duties to a level of 20 per cent to be reached in 
1842. The low level lasted but a few months, when a change in the 



TARIFF POLICY 581 

political party in control of the government, combined with a tempor- 
ary deficit in the Treasury, led to a revision of the tariff. The tariff 
of 1842 considerably increased the duties. In a few cases such as iron, 
sugar, window glass, and salt they ranged much above 50 per cent, 
but the general level was about that of the tarifif of 1832. The 
next presidential election brought another change in the party in 
power and consequently another tariff law. The tariff of 1846 or 
Walker tariff was intended as a step toward free trade. Specific 
duties were abolished and all commodities were divided into classes, 
a fixed ad valorem rate being established for each class. The more 
important commodities were placed in Classes C and D with duties of 
30 and 25 per cent respectively. There was no further change till the 
tariff of 1857, when a superabundant revenue and a decade of unusual 
prosperity led to a further reduction with but slight objection. The 
classes of commodities were left about as before but the rates on Classes 
C and D were lowered to 24 and 19 per cent respectively, so that the 
average paid on dutiable imports was about 20 per cent. The period 
thus ending is marked by lowered rates of duty, rapidly advancing 
manufactures, and a lessened demand for protection. 

The third period, 1861 — ; A high protective tariff. — The Civil War 
marks the beginning of a new period in our tariff history, a period 
when the level of duties prevailing was distinctly higher and the 
construction of the tariff schedules more exclusively designed to 
secure protection than ever before. 

As has so frequently been the case, the immediate cause for the 
changes was due not to the needs of industry but to the lack of revenue. 
In fact even before the war broke out the deficit in the Treasury follow- 
ing the decline in imports after the panic of 1857 started the move to 
increase duties which resulted in the Morrill tariff of 1861. The 
outbreak of the war with its enormous expenses necessitated a large 
increase in revenue and along with the imposition of new income and 
internal revenue taxes the customs duties were increased. There 
were many changes at this time but the most important acts were those 
of 1862 and 1864, and duties were advanced so rapidly that under the 
tariff of 1864 the country came out of the war with the rates on 
dutiable commodities averaging 47 per cent. 

The most striking feature of the period following was that these 
high duties, which everybody supposed were simply temporary and 
only justified by the existence of a great national emergency, were 
not appreciably reduced, with the exception of revenue-producing 



582 My\TERIALS FOR ELEMENTARY ECONOMICS 

duties, but in many cases still further increased as time went on so 
that the policy of high protection became a permanent one. The 
following are among the more important reasons for this change: (i) 
the manufacturers, many of whom suffered especially at the close of 
the war, having become adjusted to high rates during a considerable 
period, naturally opposed any reduction; (2) the protected interests 
were better organized than ever and seem to have been more potent 
than formerly; (3) the opposition of the South was no longer a factor 
of such importance as before the war; (4) it was claimed that the 
heavy debt created by the war necessitated more revenue, though 
in fact the receipts from customs duties combined with those from 
internal revenue duties soon proved more than adequate for the needs 
of the government. This was partly due to the permanent retention 
of some of the internal revenue duties, chiefly those on tobacco and 
distilled liquors, which yielded so large a return that from this time 
on the customs duties made up scarcely more than 50 per cent of 
the total receipts of the government as compared with nearly 90 
per cent during the period preceding the war.^ 

During the years immediately following the war there were a 
number of changes affecting particular commodities, most of them 
being designed to abolish duties chiefly revenue-producing in character, 
while other increased duties primarily for protection. Even then the 
revenue receipts were excessive, so in 1873 a general cut of 10 per cent 
was made, but in 1875, when the receipts fell off owing to the panic, 
the old rates were restored. With returning prosperity in the eighties 
the receipts far exceeded even the resulting lavish appropriations of 
Congress and caused the agitation which finally led to a general 
revision under the tariff of 1883. A small reduction was made in a 
considerable number of cases, though chiefly where protection was 
either unnecessary or already excessive, but in some instances still 
higher duties were imposed. The net result was a slight reduction, 
the average rate on dutiable commodities being 38 per cent. 

During the next few years there were several attempts to secure 
still further reduction, but owing to the fact that political power in 
the two branches of Congress was divided between two parties nothing 
was accomplished till 1890, when the McKinley tariff was passed. 
This act brought in a distinctly higher level of protective duties, the 
average being 49 per cent. Among the more important advances were 

" [See Selection 245, Chart of Principal Sources of Federal Revenue, by Decades^ 
1800-1910. — Editors.] 



TARIFF POLICY 583 

those on wool and woolens, silks, the finer cottons, linens, cutlery, and 
tin plate, while a special attempt was made to extend the benefits of 
protection to the farmer by duties on various farm products. The 
difficulty with the excessive revenue was met by abolishing the 
duty of 2 cents a pound on sugar, which yielded a large return, and 
in compensation giving domestic sugar-growers an equivalent bounty. 
There was also a provision for reciprocity, which, however, accom- 
plished little. 

The return to power of the Democratic party combined with a 
deficit led to the Gorman- Wilson tariff of 1894. As passed by the 
House several important commodities were placed on the free list, but 
in the Senate opposition was so strong that only raw wool was finally 
left there. Reductions were made on a large number of commodities, 
but they were not so severe as had been anticipated, and the resulting 
average rate of duty was about 40 per cent. For the sake of the 
revenue a moderate duty on sugar was reimposed and an income 
tax, later declared unconstitutional, was added. 

The Republicans, victorious in a campaign fought over the 
question of free silver, no sooner returned to power than the Dingley 
tariff of 1897 was enacted. Under this law the protective duties were 
advanced to an average rate of 57 per cent, the highest in the history 
of the country. The duty on raw wool was restored and that on sugar 
was increased as were the duties on most of the textiles. 

In the course of the unusually long period during which this 
tariff — the high-water mark of protection — remained on the statute 
books there developed a widespread demand for a reduction of the 
tariff. Among the more important causes were the following: 
(i) manufacturers of the more finished products supplying the 
domestic market felt that the tariff increased the cost of their raw 
material; (2) a similar complaint was made by those manufacturing 
for a foreign market where they had to compete with rivals enjoying 
free raw materials; it was also argued that lower American duties 
might secure concessions in the form of lower duties on American 
goods abroad; (3) there developed a feeling among the farming class 
that in actual operation protection chiefly benefited the manufacturer 
while the farmer gained very little and generally lost by it; (4) the 
rapid growth of trusts, which many believed were at least aided by, if 
not primarily due to, the tariff; (5) the rising cost of living which it 
was argued could be partially counteracted by lower tariff duties; 
(6) the desire to conserve our natural resources, the exhaustion of 



584 MATERIALS FOR ELEMENTARY ECONOMICS 

which was hastened by the tariff; (7) a growing sensitiveness to any 
form of special privilege and a feeling that the tariff was one of the 
chief sources of such privilege. 

As a concession to the popular demand the Payne-Aldrich tariff 
of 1909 was passed. The generally announced plan to reduce duties 
to an amount just sufficient to offset the difference in cost between the 
United States and other countries indicated that many had been 
unnecessarily high before. The result, however, was disappointing, 
the reductions being slight and usually where they had little effect. 
It was this dissatisfaction which led the Democratic party on its 
return to power to undertake at once a revision of the tariff. The 
Underwood bill, if it is enacted as at present with free wool and, after 
three years, free sugar, together, with very considerable cuts in many 
other lines, especially trust-controlled products, so that the average 
rate of duty has been estimated at about 30 per cent, will prove a more 
substantial reduction in protection than has occurred since the Civil 
War. However, the tariff will still remain essentially protective in 
character.^ 

Looking back over the whole history of the tariff perhaps two 
features stand out as the most striking: (i) At the opening of the 
twentieth century, when we had become a great manufacturing nation, 
and after nearly one hundred years of protection, our tariff duties 
had advanced to the highest point known, about twice as high as 
when the manufactures of the country were in their infancy. (2) The 
method of constructing the tariff schedules and the changes in our 
tariffs have been very largely determined by the fluctuations in the 
fiscal needs of the government or by the ups and downs and general 
exigencies of politics rather than by any careful study of the changing 
conditions in the different industries. The tariff has been unscientific 
in the extreme. 

' As this is written the Underwood bill is still before Congress. 



TARIFF POLICY 585 

172. PRINCIPAL SOURCES OF CUSTOMS REVENUE, 191 2' 

Breadstufifs $4,993,694 

Chemicals, drugs and dyes 7,033,225 

Cotton, manufactures of 35,253,111 

Earthen, stone and china ware 5,876,725 

Fibers, vegetable, and textile grasses and manufactures of . . . 22,698,044 

Fruits and nuts 8,407,965 

Iron and steel, manufactures of 8,837,875 

Silk, manufactures of 14,096,458 

Spirits, wines, malt liquors and other beverages 17,328,055 

Sugar 50,603,314 

Tobacco and manufactures of 25,571,508 

Vegetables 6,642,322 

Wool and manufactures of 27,053,480 

All other sources 76,925,896 

Total customs revenue .- $311,321,672 

173. THE BALANCE OF TRADE AND PROTECTION 

(a) A MERCANTILIST POINT OF VIEW^ 

But for the reader's ease, I shall first sum up what has been said 
as short as possible, in the following propositions : 

1. That the prosperity and happiness of this kingdom depend 
very much upon our foreign trade. 

2. That we have no gold or silver of our own growth; that all 
we have is imported from abroad in exchange for the product and 
manufactures of our own country. 

'Compiled from the Statistical Abstract of the United Stales, 1912, pp. 671-75. 

[For a diagrammatic statement of the importance of customs revenue in the 
total ordinary receipts of the United States government, see Selection 245. — 
Editors.] 

^ Adapted from Charles King, The British Merchant, 3d edition, 1 748; I, 18-35 , 

144-45- 

[This book, originally written in England in 1713, was occasioned by the 
violent discussion aroused in that country over the two treaties of commerce with 
Portugal and with France, proposed at the close of the wars ended by the Treaty 
of Utrecht, and designed to give greater freedom of trade between England and 
those countries. At that period the balance of trade in the commerce between 
England and Portugal was favorable to England but it was unfavorable in the 
commerce between England and France. Hence British mercantilist writers 
favored the treaty with Portugal but were bitterly opposed to the treaty with 
France. — Editors .1 



586 MATERIALS FOR ELEMENTARY ECONOMICS 

3. That we gain gold and silver from those countries which do 
not sell us so great a value of manufactures as they take from us; 
for in this case the balance must be paid in money. 

4. That we must pay a balance in money to such countries as 
sell more manufactures than they take from us; and that the capital 
stock of bullion is diminished by such a commerce, unless the goods 
we import from an over-balancing country shall be re-exported. 

5. That we are most enriched by those countries which pay us 
the greatest sums upon the balance; and most impoverished by 
those which carry off the greatest balance from us. 

6. That the trade of that country which contributes most to the 
employment and subsistence of our people, and to the improvement 
of our lands, is the most valuable. 

7. That the trade which lessens most the subsistence of our 
people, and the value of our lands, is the most detrimental to the 
nation. 

8. That that country which does not sell us so many manufactures 
as it buys from us, contributes the whole value of the balance to the 
employment and subsistence of our people, and to the product of our 
lands. 

Q. That the country which sells us more than it buys from us, 
takes the whole value of the balance from the subsistence of our 
people and the landed interest. 

10. That therefore the balance which is either paid or received 
by means of our trade with any particular country, is one certain 
medium to judge of the value of our trade: That is, every particular 
trade contributes so much to the subsistence of our people and the 
improvement of our lands, as the balance it pays to us for the greater 
quantity of manufactures we sell than buy; and it deducts so much 
from both for the greater quantity of manufactures we buy than sell, 
as the balance we are to pay. 

11. And lastly, that every country which takes off our finished 
manufactures, and returns us unwrought materials to be manu- 
factured here, contributes so far to the employment and subsistence 
of our people as the cost of manufacturing those materials. 

Many other maxims might be offered, but these are sufficient 
to try the value of every particular trade; or all may be still summed 
up in fewer words, thus: That trade which makes money flow in 
most plentifully upon us, enables our people to subsist themselves 
better by their labor, raises the value of our lands, and occasions our 



TARIFF POLICY 587 

rents to be better paid, must always be reckoned the best trade; for 
these are the only rules by which it is possible to state and determine 
the value of any particular trade, or of the general trade of the whole 
nation. I shall illustrate this by a few instances. 

If we export any value of our manufactures for the consumption 
of a foreign nation, and import thence no goods at all for our own 
consumption, it is certain the whole price of our own manufactures 
exported must be paid to us in money, and that all the money paid 
to us is our clear gain. 

The merchant perhaps does not get 20 per cent by the goods he 
sends abroad; yet if he sells his goods for the very price he paid for 
them, and brings back the whole price in money, and not in goods, 
to his native country, the merchant in this case gets nothing, but his 
country gets clear the whole value of the goods. 

To make this intelligible, if I ask any man what is the gain of 
the day-laborer or manufacturer, he will answer me, that it is just 
so much as he earns by his work for the subsistence of himself and 
his family. His whole wages are his gain. 

If his whole time is taken up in working for the consumption of 
the Portuguese; for instance, if his whole wages are paid him by that 
nation, he gains from Portugal the whole value of his yearly labor. 
And the same thing must be said of the Portuguese manufacturer 
that works for the consumption of the English nation ; he clears his 
whole wages from this kingdom. 

But still the question is, how much of these wages is gained or 
lost to the one nation or the other ? 

It is certain, that all that the consumption of Portugal pays to 
the English laborers, more than is paid by the consumption of England 
to the laborers of Portugal, is clear gain to England and so much loss 
to Portugal. And therefore if the wages of English people for labor 
bestowed on the corn, lead, tin, woolen, and other manufactures 
exported to Portugal, should amount to £800,000 per an. and the 
wages of the Portuguese for their labor bestowed upon the wine, oil, 
fruit, and other products of that country imported hither for the 
consumption of our people, should amount to no more than £200,000 
per an., it is clear that in the article of wages for labor, setting the 
wages of one people against those of the other, we gain by the balance 
£600,000 per an. 

The next question is, what is gained or lost by the exchange of 
the product of the land between both nations ? 



588 MATERIALS FOR ELEMENTARY ECONOMICS 

And here another question will arise, what is gained by the gentle- 
man or landholder ? I believe every man will give me this answer, 
that he gets just so much as is given for the product of the land, clear 
of the charge of labor that is bestowed upon it; and whoever is the 
consumer, whether this or a foreign nation, pays the gentleman so 
much of his rent. 

If the corn, lead, tin, woolen, or other manufactures of this 
kingdom, are exported to Portugal for the consumption of that nation, 
it is certain that Portugal pays the English landholder the whole rent, 
or in other words, the whole price which is paid upon account of rent 
for those goods; which is indeed the whole price that is paid for them, 
deducting the wages given for the labor bestowed upon them. The 
same thing must be said of England; the landholder of Portugal gets 
just so great a part of his rent from England, as is paid by the con- 
sumption of this nation to the rents of that kingdom. 

How much then is gained or lost to the landholders of either 
nation ? All that is given for the mere product of the English lands 
by the Portuguese, more than is given for the mere product of Portugal 
by the English, is so much gain to England, and so much loss to 
Portugal. 

Suppose then that the product of the lands of England (clear of 
the wages of the laborers) exported to Portugal, should amount to 
£400,000 per an. and that the product of Portugal, clear of labor, 
imported into England, should amount to no more than £100,000 per 
an. the difference is £300,000 per an. The EngHsh landholders gain 
so much yearly from Portugal, and Portugal loses so much to this 
nation. 

The last thing is the gain of the merchant. The merchant gains 
all that part of the price of his goods in which his sale exceeds his 
purchase; and this difference of the price is paid by the consumer. 
If England is the consumer, the merchant gains this difference in 
England, but England gets nothing by her consumption. But if 
Portugal is the consumer of the goods exported by the English 
merchant, he gains the whole difference from Portugal. And so in 
like manner does the Portuguese merchant get from England the 
whole difference of the price upon all goods which he buys in Portugal, 
and sells to this kingdom. 

Suppose then that our English merchants buy here the product 
of our lands manufactured by the labor of our people, at the cost of 
£1,200,000 per an. and sell the same to Portugal for £1,300,000 per 



TARIFF POLICY 589 

an. our English merchants get from that country £100,000 per an. 
On the other hand, if the merchants in Portugal buy there their oil, 
wine, fruit, etc. at the cost of £300,000 per an. and sell the same to 
England for £325,000 per an. their gain from England is no more 
than £25,000 per an. So that in this very article of the merchant's 
gain, England would get clear £75,000 per an. from Portugal; and 
so much would be yearly lost to that nation. 

For my own part, I know no other way of estimating the profit 
and loss of trade between two nations. All that the labor of the 
people, the product of the lands, and the gain of the merchants in one 
nation, exceed in value those in the other, is so much gain to the 
first, and so much loss to the second. This is plain and obvious to 
every person, even of the meanest capacity. 

To illustrate this further, in trying the worth of any particular 
trade by the exports and imports between two nations. 

If we have at any time imported from France (for our own con- 
sumption) a greater value of goods and merchandise than we exported 
for the consumption of that country, it is certain that one way or 
other we paid the balance in money; and whether we paid this by 
exporting bullion out of England, or by drawing bullion from other 
nations indebted to us into France, the case is the very same; that 
whole balance was so much loss to this kingdom ; so much we may be 
said to have lost by our French commerce. 

But the nature of goods and merchandise exported and imported 
between the two nations, ought also to be considered. 

If we paid this balance in money for manufactures which must 
needs have interfered with our own ; that is, which must have hindered 
the sale of such a value of our manufactures at the same market, and 
did not open a new vent for them at any other, it is manifest that both 
our landholders and our laborers must have been deprived by means 
of this commerce of all those sums of money which were paid away 
for the product and manufactures of France; as also, that that country 
had been so much enriched by the impoverishment of this kingdom. 

It is not to be expected that our own people will ever buy the 
product or manufactures of their own country, if the like are to be 
had cheaper from foreign nations. Therefore those of foreign 
nations are either prohibited or loaded with high duties, that our own 
may have no rival to contend with among ourselves. And I make 
no doubt that the use of foreign manufactures in England will always 
be discouraged by our legislators for this very reason, that our own 



590 MATERIALS FOR ELEMENTARY ECONOMICS 

consumption, which pays ainnually the sum of 42 millions to our own 
product and manufactures, that is to the rents of our lands and the 
labor of our people, may never pay any part of the above mentioned 
sum to the rents and labor of foreign nations; or at least that sufficient 
care will be always taken that the consumption of every other nation 
shall pay as much to the rents and labor of Great Britain, as Great 
Britain shall pay to any such other nation. And there is no way of 
doing this but by prohibitions or high duties, to prevent our being 
overbalanced by their importations. 

(b) AN AMERICAN ARGUMENT' 

There can be no question — it does not argue common-sense in any 
man to get up and maintain to the contrary upon the great principles 
of political economy — there can be no question, I say, that it is best 
for any country under heaven to produce the articles it manufactures 
and to manufacture the articles it produces, as far as possible. Any 
government that is a buyer of the products of a foreign government 
when it can produce those articles itself, must be engaged in a miser- 
able business to the extent to which it does it. As has been said 
by the friend who preceded me, the true wealth of a nation depends 
upon the products of its soil and the labor that is bestowed in fitting 
those products for the use of man, and every dollar which we pay 
to encourage the labor of other countries, to stimulate the production 
of other countries, is so much taken from our own, and so much taken 
from the actual wealth of the country. 

174. A HOME-MARKET ARGUMENT^ 

The food supply is increasing more rapidly than population. In 
the period of 39 years, ending in 1889, population in the United 
States has increased 175 per cent; corn 257 per cent; wheat 389 per 
cent; oats 411 per cent; swine 66 per cent. The necessity for 
increasing our home market for corn and oats is pressing. Importa- 
tion of wool diminishes the home market and the increase of our 
flocks enlarges it. If sheep flocks are increasing, our wheat product 
will be reduced, our home demand for corn and oats increased, and 
we will have a home market for our cereals. Every bushel of grain 

' Transactions National Association of Wool Manufacturers, Proceedings of 
the Syracuse Convention (1865), pp. 5-6. 

*Based upon William Lawrence, Memorial of the Ohio Wool Groicers' Association, 
in Senate Miscellaneous Documents, No. 35, 53d Congress, 2d Session, pp. 150-52. 



TARIFF POLICY 591 

exported carries away fertility; every pound of wool imported sup- 
plants so much grain, etc., which we might have grown. The home 
market for wool is the only home market for farm products never 
supplied. 

Nearly $100,000,000 annually sent out of the United States for 
foreign wool, including that imported in manufactures, should be kept 
at home and go into the pockets of American farmers in exchange 
for American wool and corn and oats, thereby increasing the demand 
for these cereals. And this money is sent to countries that take sub- 
stantially nothing from us but gold. When we import wool we have 
it as an element of perishable wealth, and foreign countries take for 
it and have as an element of permanent wealth the gold which we 
should have kept in this country and paid to American woolgrowers. 
When we produce all needed wools we have them and also the gold 
which pays for them for our American citizens, a double source of 
wealth. 

175. IMPROVED TRANSPORTATION AND PROTECTION 

(a) AN AMERICAN CAMPAIGN ARGUMENT' 

Originally the danger to domestic industries from foreign compe- 
tition was much less than at the present time. Merchandise brought 
into any country from abroad must first bear the cost of -transporta- 
tion, and in times when the cost of transportation was great, and when 
goods were necessarily transported by animal power and by sailing 
vessels only, this high cost of carriage was of itself a protection to the 
domestic producer in any country. True, the producer of merchan- 
dise just across the border line of a country had an enormous advan- 
tage over the producer a thousand or five thousand miles distant, 
but as only a small proportion of the producers were located near 
to the border line such countries did not find it necessary to establish 
high tariffs to protect their own producers or manufacturers. The 
distance which foreign goods must be carried and the cost of trans- 
portation over that distance alone serve to create a protective wall 
for the domestic producer. In late years these conditions of distance 
and transportation have absolutely changed. The railroad and the 
modern steamship have reduced the cost of transportation compared 
with that in the early part or even in the middle of the century just 
ended; while the telegraph and the telephone have annihilated dis- 

' From the Republican Campaign Text-Book, igoS, pp. 106-7. 



592 MATERIALS FOR ELEMENTARY ECONOMICS 

tance and time. Merchandise from the interior 6f Europe, ordered 
by telephone, telegraph, and cable, transported from its place of 
production by trolley road, canalized rivers, or boats operated by 
steam or electricity, or by railway to the Atlantic, and thence by . 
great steamships, built to carry hundreds of carloads at a single 
voyage, across the ocean, and again transported to the interior of the 
United States by the cheapest land transportation ever known to man, 
can be placed at the door of the consumer in the Mississippi Valley 
for a very small percentage of the cost of transporting the same at the 
middle of the last century. As a result the protection which distance 
and the cost of transportation afforded to the local producer has dis- 
appeared, and without a protective tariff, established by the Govern- 
ment, he has as his direct competitor the low-priced labor of any and 
every part of the world. 

(b) A SPANISH ANALOGY' 

Some years ago I happened to be at Madrid, and went to the 
Cortes. The subject of debate was a proposed treaty with Portugal 
for improving the navigation of the Douro. One of the deputies 
rose and said: "If the navigation of the Douro is improved in the 
way now proposed, the traffic will be carried on at less expense. The 
grain of Portugal will, in consequence, be sold in the markets of Castile 
at a lower price, and will become a formidable rival to our national 
industry. I oppose the project, unless, indeed, our ministers will 
undertake to raise the tariff of customs to the extent required to 
re-establish the equilibrium." The Assembly found the argument 
unanswerable. 

Three months afterward I was at Lisbon. The same question 
was discussed in the Senate. A noble hidalgo made a speech: "Mr. 
President," he said, "this project is absurd. You place guards, at 
great expense, along the banks of the Douro to prevent Portugal being 
invaded by Castilian grain; and at the same time you propose, also 
at great expense, to facilitate that invasion. This is a piece of incon- 
sistency to which I cannot assent. Let us leave the Douro to our 
children, as it has come to us from our fathers." 

Afterward, when the subject of improving the navigation of the 
Garonne was discussed, I remembered the arguments of the Iberian 
orators, and I said to myself: If the Toulouse deputies were as good 
economists as the Spanish deputies, and the representatives of Bor- 

' From Frederic Bastiat, Sophismes economiques, translated by P. J. Stirling, 
pp. 99-100. G. P. Putnam's Sons, 1909. 



TARIFF POLICY 593 

deaux as acute logicians as those of Oporto, assuredly they would 
leave the Garonne 

Dormir au bruit flatteur de son onde naissante; 

for the canalization of the Garonne would favor the invasion of 
Toulouse products, to the prejudice of Bordeaux, and the inundation 
of Bordeaux products would do the same thing to the detriment of 
Toulouse. 

176. TWO PROPOSALS FOR INCREASING THE DEMAND FOR 

LABOR' 

I. A CHINESE EXPEDIENT 

There were in China two large towns, called Tchin and Tchan. 
A magnificent canal united them. The Emperor thought fit to order 
enormous blocks of stone to be thrown into it for the purpose of 
rendering it useless. 

On seeing this, Kouang, his first mandarin, said to him: "Son 
of Heaven! this is a mistake." 

To which the Emperor replied: "Kouang, you talk nonsense." 

I give you only the substance of their conversation. 

At the end of three months the Celestial Emperor sent again for 
the mandarin, and said to him: "Kouang, behold!" 

And Kouang opened his eyes, and looked. 

And he saw at some distance from the canal a multitude of men 
at work. Some were excavating, others were filling up hollows, 
leveling and paving. And the mandarin, who was very cultivated, 
said to himself: They are making a highway. 

When other three months had elapsed the Emperor sent again for 
Kouang, and said to him: "Look!" 

And Kouang looked. 

And he saw the road completed, and from one end of it to the 
other he saw here and there inns for travelers erected. Crowds of 
pedestrians, carts, palanquins, came and went, and innumerable 
Chinese, overcome with fatigue, carried backward and forward 
heavy burdens from Tchin to Tchan, and from Tchan to Tchin. And 
Kouang said to himself: It is the destruction of the canal which gives 
employment to these poor people. But the idea never struck him 
that their labor was simpl}^ diverted from other employments. 

' From Frederic Bastiat, Sophismes economiques, translated by P. J. Stirling, 
pp. 216-20 and 162-64. G. P. Putnam's Sons, 1909. 



594 MATERIALS FOR ELEMENTARY ECONOMICS 

Three months more passed, and the Emperor said to Kouang: 
"Look!" 

And Kouang looked. 

And he saw that the hostelries were full of travelers, and that to 
supply their wants there were grouped around them butchers' and 
bakers' stalls, shops for the sale of edible birds' nests. He also saw 
that, the Artisans having need of clothing, there had settled among 
them tailors, shoemakers, and those who sold parasols and fans; 
and as they could not sleep in the open air, even in the Celestial 
Empire, there were also masons, carpenters, and slaters. Then there 
were officers of police, judges, fakirs; in a word, a town with its sub- 
urbs had risen round each hostelry. 

And the Emperor asked Kouang what he thought of all this. 

And Kouang said that he never could have imagined that the 
destruction of a canal could have provided employment for so many 
people; for the thought never struck him that this was not employ- 
ment created but labor diverted from other employments, and that men 
would have eaten and drank in passing along the canal as well as in 
passing along the highroad. 

II. A FRENCH PETITION TO THE KING 

Sire: When we observe these free trade advocates boldly dis- 
seminating their doctrines, and maintaining that the right of buying 
and selling is implied in the right of property (as has been urged 
by M. Billault in the true style of a special pleader), we may be per- 
mitted to feel serious alarm as to the fate of our national labor; for 
what would Frenchmen make of their heads and their hands were 
they free ? 

The administration which you have honored with your confidence 
has turned its attention to this grave state of things, and has sought 
in its wisdom to discover a species of protection which may be substi- 
tuted for that which appears to be getting out of repute. They pro- 
pose a law to prohibit your faithful subjects from using their right hands. 

Sire, we beseech you not to do us the injustice of supposing that 
we have adopted lightly and without due deliberation a measure which 
at first sight may appear somewhat whimsical. A profound study of 
the system of protection has taught us this syllogism, upon which the 
whole doctrine reposes: The more men work, the richer they become; 
the more difficulties there are to be overcome, the more work; ergo, the 
more difficulties there are to be overcome, the richer they become. 



TARIFF POLICY 595 

In fact, what is protection, if it is not an ingenious application 
of this reasoning — reasoning so close and conclusive as to balk the 
subtlety of M. Billault himself ? 

Let us personify the country, and regard it as a collective being 
with thirty millions of mouths, and, as a natural consequence with 
sLxty millions of hands. Here is a man who makes a French clock, 
which he can exchange in Belgium for ten hundredweights of iron. 
But we tell him to make the iron himself. He replies: "I cannot, it 
would occupy too much of my time; I should produce only five 
hundredweights of iron during the time I am occupied in making a 
clock." Utopian dreamer, we reply, that is the very reason why we 
forbid you to make the clock, and order you to make the iron. Don't 
you see we are providing employment for you ? 

Sire, it cannot have escaped your sagacity that this is exactly the 
same thing in effect as if we were to say to the country, Work with your 
left hand and not with the right. 

To create obstacles in order to furnish labor with an opportunity 
of developing itself was the principle of the old system of restriction, 
and it is the principle likewise of the new system which is now being 
inaugurated. Sire, to regulate industry in this way is not to innovate, 
but to persevere. 

As regards the efficiency of the measure, it is incontestable. It is 
diflficult, much more difficult than one would suppose, to do with the 
left hand what we have been accustomed to do with the right. You 
will be convinced of this, Sire, if you will condescend to make trial 
of our system in a process which must be familiar to you; as, for 
example, in shuffling a pack of cards. For this reason, we flatter our- 
selves that we are opening to labor an unlimited career. 

When workmen in all departments of industry are thus confined to 
the use of the left hand, we may figure to ourselves, Sire, the immense 
number of people that will be wanted to supply the present consump- 
tion, assuming it to continue invariable, as we always do when we com- 
pare two different systems of production with one another. So 
prodigious a demand for manual labor cannot fail to induce a great 
rise of wages, and pauperism will disappear as if by enchantment. 

Sire, your paternal heart will rejoice to think that this new law of 
ours will extend its benefits to that interesting part of the community 
whose destinies engage all your solicitude. What is the present 
destiny of women in France ? The bolder and more hardy sex drives 
them insensibly out of every department of industry. 



596 MATERIALS FOR ELEMEJfTARY ECONOMICS 

But the moment your new law comes into operation, the moment 
right hands are amputated or tied up, the face of everything will be 
changed. Twenty times, thirty times, more embroiderers, polishers, 
laundresses, seamstresses, milliners, shirtmakers will not be sufficient 
to supply the wants of the kingdom, always assuming, as before, the 
consumption to be the same. 

This assumption may very likely be disputed by some cold 
theorists, for dress and everything else will then be dearer. The same 
thing may be said of the iron which we extract from our own mines, 
compared with the iron we could obtain in exchange for our wines. 
This argument, therefore, does not tell more against left-handed men 
than against protection, for this very dearness is the effect and the 
sign of an excess of work and exertion, which is precisely the basis 
upon which, in both cases, we contend that the prosperity of the work- 
ing classes is founded. 

Yes, we can make a touching picture of the prosperity of the 
millinery business. What movement! What activity! What life! 
Every dress will occupy a hundred fingers, instead of ten. No young 
woman will be idle, and we have no need. Sire, to indicate to your 
perspicacity the moral consequences of this great revolution. Not 
only will there be more young women employed, but each of them 
will earn more, for they will be unable to supply the demand; and if 
competition shall again show itself, it will not be among the seam- 
stresses who make the dresses, but among the fine ladies who wear 
them. 

You must see then. Sire, that our proposal is not only in strict 
conformity with the economic traditions of the government, but it is 
in itself essentially moral and popular. 

To appreciate its effects, let us suppose the law passed and in 
operation — let us transport ourselves in imagination into the future — 
and assume the new system to have been in operation for twenty years. 
Idleness is banished from the country; ease and concord, contentment 
and morality, have, with employment, been introduced into every 
family — no more poverty, no more vice. The left hand being very 
awkward at all work, employment will be abundant, and the remunera- 
tion adequate. Everything is arranged on this footing, and the 
work shops in consequence are full. If, in such circumstances, 
Sir, Utopian dreamers were all at once to agitate for the right hand 
being again set free, would they not throw the whole country 
into alarm ? Would such a pretended reform not overturn the whole 



TARIFF POLICY 597 

existing state of things? Then our system must be good, since it 
could not be put an end to without universal suffering. 

And yet we confess we have the melancholy presentiment (so 
great is human perversity) that some day there will be formed an 
association for right-hand freedom. 

177. THE LAW OF COMPARATIVE COSTS AND THE WORKING 
OF THE TARIFF' 

No one can expect to have a well-grounded opinion on the pro- 
tective controversy who is not trained in general economic reasoning; 
and any conclusions he may reach on general reasoning cannot be 
proved by facts and figures. If his general conclusions are once 
firmly fixed in his mind, he can simply illustrate them by facts derived 
from history and statistics. 

There are, however, some aspects of the tariff question on which 
the inductive and historical mode of inquiry is more helpful. The 
protective policy of the United States has had unexpected successes 
and surprising failures. By successes here I mean that sometimes 
the duties have brought about a considerable development of the 
protected industry; while by failures, I would describe those cases 
in which there has been an absence of such development. It need 
not be repeated that success or failure in this sense does not necessarily 
imply advantage or disadvantage to the community at large: it 
indicates only whether the immediate object in view^ has been attained 
by the protective measures. There have been curious differences 
in the extent to which this primary object of protection has been 
attained; and the results have varied, not only in different branches 
of manufactures, but, what is more surprising, in different sorts of 
agricultural production. The history of some cases of this kind 
throws light at least on some important questions bearing on the 
protective controversy. It helps in ascertaining what would probably 
have been the general character of our industries if there had been 
no protection; whether, for example, without high duties the United 
States would be an exclusively agricultural country. It serves, 
moreover, to illustrate, if not to prove, a familiar economic prin- 
ciple — the doctrine that comparative costs determine the range of 
international trade. 

' Adapted from F. W. Taussig, The Tariff History of the United Stales, 4th ed., 
pp. 364-409. G. P. Putnam's Sons, 1899. 



V 



598 MATERIALS FOR ELEM^TARY ECONOMICS 

The first case to which I will turn is that of the production of 
flax fiber. In general, agricultural commodities are exported from 
the United States on a large scale, and protective duties on them, 
while they have been frequently imposed, are nominal: agricultural 
products would not be imported in any event. .But with flax we 
find the reverse of the usual conditions. Flax has been imported 
into this country for generations, and import duties have had no 
perceptible effect in checking importation or in stimulating the 

production of flax at home The small quantity of flax now 

raised is of coarse quality, quite unsuited to the making of linen 
cloth. Meanwhile, importation continues steadily. The imports of 
flax fiber were in 1886, 3,700 tons, and in 1890 about 5,500 tons. The 
act of 1890 made a further attempt to check imports and stimulate 
home production by again increasing the duty, but the same causes 
which made earlier efforts of this sort futile remain in force to check 
this one. 

What, now, is the explanation of a state of things so different 
from that which prevails as to most agricultural products ? We get 
hints towards a solution of the problem by examining the conditions 
under which flax is raised in foreign countries. In the first place, 
flax is eminently a product of intensive culture, grown in countries 
like Belgium and France, whose agriculture is tjrpical of intensive 
culture. A laborious and careful preparation of the ground is required. 
Several ploughings and harrowings are called for; for the best flax, 
the land is trenched by spade. The ground must be carefully weeded, 
and "in Belgium the weeding is done by hand, when the plants are 
a few inches high, by women and children who crawl about on their 
hands and knees, with cloths to protect them from the ground, work- 
ing always towards the wind, so that the plants may be at once 
blown back to an upright position." From twenty-five to thirty 
tons of manure per acre are ploughed in, and, in addition, liquid 
manure is applied. The harvest is as laborious as the preparation. 
The plants are pulled by the roots; for cutting by machine or by 
scythe spoils the fiber, and, moreover, the parts of the plant nearest 
the ground, which is lost by cutting, contains the best fiber. 

The process of preparing flax for market, however, is by no means 
completed when it has been taken from the ground. It must first 
be rotted, then scutched, finally hackled. Rotting consists in immers- 
ing the plants in water, and thereby loosening the coarse external 
covering from the inner fiber which is to be converted into Hnen. 



TARIFF POLICY 



599 



In the United States, this has been done for both flax and hemp by 
"dew-rotting" — that is, leaving the plants exposed to the dew in the 
fields; but this method, while simple and easy, makes poor fiber, 
Fiber of good quality can only be made by immersion for between 
five and ten days in water, which becomes foul and noisome from 
the decomposition of the plants. ''The flax is then removed from 
the pools, and in this operation too much care cannot be used. Hooks 
or pitchforks injure the fiber, and the bundles must be handed out 
by a man who stands in the now disgusting pool." 

These bundles, when dried, are ready for the next operation, 
scutching, by which the inner woody pith of the plant is removed. 
The ancient method of doing this was simply to beat the stalks with 
clubs, and the reader of Tourgueneff's novels need not be told that 
this method is still used in Russia. Elsewhere, machines are in use, 
but only to a slight extent. Machines for breaking up the pith seem 
easy to get, and are simple enough ; in Ireland, this part of the process 
is carried out by putting the stalks under cart-wheels. But scutching 
proper, the removal of the broken pith, is generally done by hand 
"by beating the fiber with a blunt knife while it is held over the 
edge of a sharpened board." Finally, after scutching, comes hackling, 
which corresponds to the carding or combing of wool and cotton, and 
which leaves the clean flax fiber ready for spinning. This again was 
done universally by hand at the time when the Commission of 1865 
reported; and Mr. Whitman tells us it is still done "mostly by hand 
even in large mills." The nature of the fiber apparently prevents 
that use of machinery for which wool and cotton are so wonderfully 
adapted. 

Hemp and flax are much alike, and what has been said in regard 
to flax applies in the main to hemp. Hemp of good quality must 
also be heavily manured, should be pulled or cut close to the ground, 
water-rotted, scutched, and hackled. Bounties on hemp as well as 
on flax were given in colonial times, and duties have been imposed 
on it without interruption since the formation of the Union; yet 
hemp of the finer sort has never been raised, and has always been 
imported in considerable quantities. 

It should be noted, however, that the preceding remarks apply 
only to the cultivation of flax and hemp for the purpose of obtaining 
good fiber. Flax is grown in large quantities in the United States 
for the seed, and hemp of coarse quality is grown in considerable 
quantities. Flax for seed need not be heavily manured, nor need 



6oo MATERIALS FOR ELEMENTARY ECONOMICS 

the seed be thickly sown; weeding is unnecessary; the plants may 
be cut by scythe or machine; the seeds are easily and quickly sepa- 
rated from the fiber. Seed is produced plentifully under these 
conditions, and is sold to oil mills; but the flax straw becomes coarse 
and almost useless, and is generally burnt on the fields or sold for a 
trifle. Hemp cultivated in the same way, and then dew-rotted, 
yields a coarse fiber, suitable for bagging and other coarse fabrics; 
and it has been grown for such uses in considerable quantities, mainly 
in Kentucky. In recent years, however, jute and other tropical 
substitutes have displaced it even for these purposes, and its culti- 
vation seems to be unprofitable. 

The characteristics of the branches of agriculture which we have 
been considering are, obviously, intensive cultivation and little use 
of machinery. The American farmer spreads his labor and capital 
thin over a large surface of land; and he uses machinery and labor- 
saving devices vastly more than the peasant or the landed proprietor 
of continental Europe. It is generally implied, in discussions of our 
international trade, that the extent and fertility of our soil explain 
our great agricultural exports. This is true, as far as it goes. But 
it should be qualified by adding that the products for which we have 
the most decided advantage and which we export in largest quantity 
are those suited not only for extensive cultivation, but suited also 
for the liberal use of agricultural- machinery. Wheat and corn are 
the readiest examples of such products, and it is mainly for growing 
and harvesting these that we have achieved our triumphs in agricul- 
tural machinery. Flax and hemp, on the other hand, require inten- 
sive culture, and admit of little aid from labor-saving devices. The 
causes, therefore, of the agricultural competition of America, which 
has had so great an effect on the economic history of the last twenty 
years, are to be found not only in physical conditions of soil and 
climate, but also in those moral and intellectual differences which 
lead the American to use better tools and more machinery than his 
European competitor 

If greater use of machinery, more intelligent use of time, and 
steadier exertion were of equal advantage in all branches of agri- 
culture, they would not affect international trade; but they tell 
more in some branches than in others. The American farmer tends 
to confine his agriculture to those products for which they tell, and 
the country imports agricultural products for which they do not tell. 
The rule does not, of course, hold good in all branches of agriculture. 



TARIFF POLICY 6ci 

Peculiar advantages of soil and climate suffice in some cases, of which 
cotton and tobacco are the most ob\ious and important, to give a 
superiority little affected by greater efficiency or intelligence. But 
the most striking features in our agricultural situation seem to be 
explained by this sort of reasoning; not indeed by this solely, but 
by this taken together with the effects of a wide extent of virgin and 
fertile soil. 

We may now turn to another set of cases, in manufacturing 
industry, where a similarly uneven working of protection has shown 
itself. The first case of this kind is in the silk manufacture, which 
I will examine with some detail. 

The manufacture of silk goods in the United States is in the 
main of recent date, having come into being since the Civil War. 
To this general statement, however, there are two exceptions. Sewing- 
silk has been made, in one way or another, for over a century. 
For fifty years after the Revolution, its manufacture was carried 
on, chiefly in Connecticut, as a household industry. About 1829, 
machinery began to be invented, was continually improved, and made 
the industry a manufacture in the modern sense of the term. In 
1852, a new step was taken in the production of machine-twist for 
the sewing-machines which were coming into general use. A very 
large development of this branch of the industry took place, and the 
Census of i860 reported the value of sewing-silk made to be no less 
than $3,600,000. The second branch of the silk manufacture which 
sprang up before the Civil War, was the making of fringes and trim- 
mings. We have little information as to its early history, but in 
i860 its products were found by the census to be worth $2,800,000. 
Neither the manufacture of sewing-silk nor that of trimmings received 
during this period any special encouragement from import duties. 
Sewing-silk had been admitted between 1833 and 1841 at a duty 
which gradually went down from 40 to 20 per cent. Other silk 
manufactures were admitted free of duty. The tariff act of 1842 
imposed higher specific duties for a few years, but the act of 1846 
imposed a duty of 30 per cent on sewing-silk and one of 25 per cent 
on other silk manufactures. These rates were reduced to 24 and 
19 per cent respectively in 1857. Notwithstanding these moderate 
duties — moderate, at least, in comparison with those of later years — 
there was a marked growth in the manufacture of sewing-silk and of 
trimmings between 1850 and i860. Other branches of the silk 
manufacture, however, did not exist. Almost all silk goods were 



6o2 MATERIALS FOR ELEMENTARY ECONOMICS 

obtained by importation from abroad. The duty on them was a 
simple revenue duty; and no question arose as to domestic production 
or protective duties. 

After the Civil War, the situation changed completely. During 
the war an increase in the silk duties was a natural resource for 
securing greater revenue; and in 1864 the general duty was 60 per 
cent. Like so many other of the duties imposed at that time, it 
remained substantially unchanged after the war closed. For more 
than a generation the protective policy has been applied vigorously 
and continuously to this industry. The high duty has brought into 
existence a considerable and varied silk manufacture. The effect 
in this case, unlike that of some other duties, was not intentional. 
The high duties on silks were imposed during the war with little 
thought of protection and without solicitation from domestic pro- 
ducers. In this respect they differ from avowedly protective duties, 
like those on wool and woolens. But they have been followed by 
more marked effects; they have created an entirely new industry. 
The development of the silk manufacture was comparatively slow 
before 1870. It proceeded more rapidly in the years of activity 
preceding 1873. A new stimulus seems to have been given by the 
Centennial Exposition of 1876. The manufacture of trimmings on 
a wider scale was first undertaken; then that of ribbons came; soon 
afterward that of brocaded and colored silks and satins, followed by 
that of plain piece-goods. The manufacture of silk handkerchiefs 
received a remarkable impulse from the Exposition. At the present 
time, the domestic silk products are at least equal in value to the 
imported. Many kinds of silk goods are no longer imported. This 
is the case not only with sewing-silks and trimmings, but with many 
articles of which the domestic production did not begin before the 
war, such as handkerchiefs and most kinds of ribbons. Other 
articles, again, are made little or not at all, especially the finest 
piece-goods. Between these classes comes the debatable ground, on 
which foreign and domestic silks compete. Here may be placed 
most dress silks,, but the domestic producers in recent years have been 
steadily increasing their hold on goods of this sort, and now supply 
much the greater part of their consumption. 

This brief sketch of the history of the silk manufacture shows 
how different has been its development from that of other textile 
industries. The manufactures of cotton and wool attained a large 
growth and a firm position long before the Civil War, while that of 



TARIFF POLICY 603 

silks is, in the main, of very recent date. Silks are still imported 
more largely than other textile goods. The explaiiation of these 
facts must be sought in the character and processes of the industry. 
The peculiarities of the silk manufacture are the result of the 
qualities of silk fiber. Raw silk is not made in the United States. 
Spasmodic attempts to encourage its production have been made, 
by bounties during the colonial period, by premiums in the early 
years of our national existence. At the present time there is a feeble 
attempt to establish it in California. The hopelessness of these 
attempts has permitted raw silk to remain on the free list, and the 
entire supply is obtained by importation. The raw silk so imported 
differs in marked ways from cotton and wool. In the first place, it 
corresponds not so much to raw cotton as to cotton carded and spun. 
It has been reeled from the cocoons, perhaps rereeled; and on the 
character of the reeling depends mainly the quality of the fiber. 

[There follows an account of the many delicate and laborious opera- 
tions, where machine methods cannot be used, which are necessary to 
prepare the thread for use in the loom.] 

Silk fiber is much less adapted to the complicated and rapidly 
moving machinery of textile manufactures than are cotton and wool. 
It is not surprising to learn that four-fifths of the looms in the city 
of Lyons are still hand-looms, and that Crefeld, the chief seat of the 
silk manufacture in Germany, is a town of household operatives. 
The necessities of the situation compel the silk manufacturers of 
this country to attempt the substitution of machinery for hand 
labor, and the use of more elaborate and more efficient methods. 
Such a change alone will enable the manufacture of an article as 
easily transportable as silks to hold its own side by side with the 
agricultural industries in which by far the greater part of our popu- 
lation is engaged. The endeavor shows itself not only in the con- 
centration of the manufacture, in the invention and increasing 
application of labor-saving machinery, in the use of power-looms 
instead of hand looms, but also in the strenuous efforts to secure raw 
silk of more even and uniform quality. The preference of American 
manufacturers for the best grades of raw silk, and their willingness 
to pay good prices for it, are not the result, as one might infer from 
some allusions to it, of any special virtue on their part. Their policy 
is due simply to the necessities of the situation. The more uniform 
the material, the more can machinery be used; the greater the use 
of machinery, the better the chance of the American producer. 



6o4 MATERIALS FOR ELEMENTARY ECONOMICS 

Hence we find that the various branches of the silk manufacture 
have been put in a firm position in proportion to the possibility of 
using machinery. Sewing-silk, the earliest branch and the most 
firmly established, is the product of American inventions. It is not 
surprising that machinery should be readily adapted to the com- 
paratively simple processes of twisting several fibers together, and 
then winding and spooling them — which are the essential processes 
in making sewing-silk and machine-silk. Another illustration of the 
same tendency, and a most instructive one, is in the successful manu- 
facture of "spun-silk" goods. These are made from waste silk; 
that is, from the fibers of damaged or incomplete cocoons, from those 
which are thrown aside as unfit for reeling in the filatures, and from 
the tangled waste left in the earlier operations of the silk mill. These 
fibers are carded and spun by methods very similar to those used 
for cotton, and they produce "a material of such perfect uniformity 
that the thread to be made from it can be produced with absolute 
mathematical accuracy of any required size." The silks made from 
it were the original "American silks"; they are made with abundant 
use of machinery; they are cheap, durable, and good. But, unfor- 
tunately, they lack a certain luster, an agreeable softness, and a 
peculiar rustling sound much prized by our better-halves. We are 
told that they are "hard." Those qualities in the fiber which make 
silks agreeable to their chief consumers seem to be lost in the processes 
of carding or rapid spinning, and spun -silk goods fail to displace 
the more insinuating articles which come from the reel. Yet their 
consumption has steadily increased. By mixture with reeled silk, 
and by other improvements, their quality has been made more agree- 
able. They are said to be specially well adapted for silk prints, and 
in the production of these the characteristics of American manu- 
factures are again illustrated. "In Europe, printing is done with 
little blocks, a few inches square, which are slowly and more or 
less imperfectly used in handwork. Here, ingenious machinery is 
employed, printing many colors at once. A machine for this purpose 
requires a special engine to drive it, in order to have it under absolutely 
accurate control as to speed, pressure, and registry. Patterns that 
cannot be perfectly matched by hand may be turned out faultlessly 
by such machinery." 

The answers to the questions presented by our sketch of the 
history of the silk manufacture now suggest themselves. The 
nature of the silk fiber was an obstacle to that extensive use of labor- 



TARIFF POLICY 605 

sa\ing machinery which is characteristic of American industry. 
The field is not promising for the ingenuity and inventiveness which 
give American manufactures their distinctive advantages 

The progress of the silk manufacture in recent years has been 
extraordinary. Ten or fifteen years ago, American dress silks were 
hardly heard of, and such as existed were of harsh and poor quality . 
At present, much the larger part of the dress silks which are used 
are of American make, and they are inferior in quality to none but 
the choicest imported goods. The dress silks which continue to be 
imported are largely figured silks. Of such goods, no great quantity 
of any one piece can be made with profit; there are not likely to be 
many purchasers whose tastes will be hit by any particular pattern. 
It does not pay to make goods of this sort on the power-loom, which, 
like all expensive machinery, is profitable only when it works con- 
tinuously and turns out large quantities at a time. The hand-loom 
turns out less at a time, and is more easily transferred to a new pattern. 
Figured silks are therefore more often made in the old way, and for 
that reason, again, are largely imported. Probably the same con- 
ditions hold good, in greater or less degree, of other imported silk 
goods. The very finest qualities of dress goods, such as require 
much individual attention from the workman — laces, some sorts 
of embroideries, velvets, and goods which are half silk, half cotton, 
or wool — make up the greater part of the importations. But with 
dress goods, as with handkerchiefs, ribbons, upholstery silks, the 
American manufacturers have wellnigh driven out their foreign 
competitors. They would continue to. hold their own, even if duties 
were considerably reduced. 

What the position of the silk manufacture might be if duties 
were entirely swept away, it is impossible to say. Some branches 
of the manufacture would probably hold their own, while others 
would disappear. Should there continue in the future a progress 
such as has undoubtedly been made in recent years in the American 
silk manufacture, it may happen in the end that most sorts of silks 
will be made here as cheaply as abroad, and that the abolition of 
protective duties would affect the silk manufacture as little as it 
would now affect the bulk of the cotton manufacture. If this proves 
to be the case, we shall have an example, and a striking one, of the 
successful application of protection to young industries. It is unlikely 
that any attempts at silk-making would have been made here but 
for the high duties of the war, and such progress as the manufacture 



6o6 MATERIALS FOR ELEMENTARY ECONOMICS 

has made may be fairly ascribed to the stimulus of protection. It 
remains to be seen whether this progress will be continued so far as 
to attain the true end of protection to young industries — the supply 
of the commodity at a price below that of the foreign article. The 
nature of the fiber makes it improbable that there will ever be any 
such complete application of machinery as in the manufacture of 
cotton and wool; but no man can say it will not be done, for the 
march of invention brings many surprises. The question turns, 
however, on this: unless there is continued application of machinery 
and continued invention of labor-saving processes, such as will make 
labor here more efficient than abroad, then, so long as our general 
economic conditions bear their present relations to those of Europe, 
we cannot expect the growth of a varied and independent silk manu- 
facture. 

The manufacture of cutlery suppHes another illustration of the 
uneven development of industries apparently similar. The duty on 
cutlery for many years was 50 per cent; yet there is a large and 
regular importation of pocket-knives. On the other hand, table 
cutlery, subject to the same duty, is practically not imported at all. 
There is a slight importation of table-knives made by certain English 
firms, whose products some well-to-do people, from habit or prejudice, 
persist in preferring; but the bulk of the table-knives used are of 
American make, and are as cheap as goods of the same quality are 
abroad. The industry being concentrated in a few large establish- 
ments, there is a strong temptation to combinations; and every few 
years there is a combination of the American manufacturers, which 
advances prices, keeps them high for a while, and then goes to pieces. 
But the knives are made as cheaply as they are in England and other 
countries, and are usually sold at prices as low. Pocket-knives and 
razors, however, although made to a considerable extent, cannot be 
made so cheaply as in England and Germany, and continue to be 
imported in the face of the duty. The explanation is again that 
machinery can be applied to the one much more than to the other. 
Table-knives are made in large quantities of a single pattern; they 
have comparatively few pieces; the blades need no very careful 
grinding — and grinding is still done largely by hand. A pocket-knife 
is a more complex thing; the pieces need to be put together by handjjr' 
they must be made to fit neatly, the blades must be carefully ground. 
If the various parts of a pocket-knife could be struck off by machinery, 
in hundreds or thousands, perfect, and complete, and then easily 



TARIFF POLICY 607 

put together, pocket-knives would doubtless be made in this country 
with complete success. Watches can be made after that fashion 
and afford a striking example of American enterprise, ingenuity, and 
success. But pocket-knives need to be of numberless patterns. The 
jobbers and retailers, who presumably know the likings of consumers, 
want few knives of any one style, and want new patterns every season. 
Obviously, production on a small scale and with little machinery, in 
the German fashion, accommodates itself to such a capricious demand 
much more readily than the American plan of using large plant, 
expensive machinery, and an inflexible process. That the American 
manufacturers have not succeeded in getting command of the domestic 
market is indicated by the fact that in 1890 and 1897 they asked, 
and in the tariff acts of those years obtained, a marked increase in 
the duties. 

Most smaller articles of hardware, however, seem to afford 
favorable opportunities for the inventive talents of American work- 
men and business men. All sorts of complicated articles — door- 
knobs, locks, hinges, house hardware and household utensils, spades, 
axes, agricultural implements, tools of all sorts — ^are not only made 
cheaply and successfully at home, but, in spite of the higher price 
of the materials of which they are made, are regularly exported; in 
large quantities. Where a massive kind of production is called for, 
a huge plant, a steady routine, a rigid economy of materials, the 
organization rather than the saving of labor, the English in general 
excel. This was probably one cause of the commanding position 
they held so long as the great producers of the crude forms of iron; 
though much was also due to the great advantage of having rich 
supplies of coal very near the iron ore. In manufactures of a more 
delicate and refined character, if I may use such adjectives in this 
connection, the Americans excel. Where the nature of the material 
or of the product gives opportunity for the deft use of labor-saving 
devices, the ingenious adaptation of a tool to just the use desired, 
the constant application of new inventions, American manufacturers 
are likely to hold their own, tariff or no tariff. 

To the present writer, it seems clear that the phases of our ec- 
onomic history which have been examined in the preceding pages, can 
be explained at bottom only on the theory of comparative costs, 
which, as he ventures to assert even at the risk of being thought 
magniloquent, sounds the depths of the international trade of the 
United States. The reason why the American farmer does not pro- 



6o8 MATERIALS FOR ELEMENTARY ECONOMICS 

duce flax fiber is not to be found in any obstacles from climate or 
physical conditions. His labor would yield as much flax, absolutely, 
as that of the European cultivator. He simply finds that his labor 
yields more in other branches of agriculture. Silks, earthenware, 
windowglass, continue to be imported, not because of any inferior 
productiveness of American labor in making them; it is because of a 
lack of that superiority which existed in other directions. 

Both in manufactures and agriculture account must be taken 
of moral and intellectual as well as of physical causes of a comparative 

advantage Adam Smith shrewdly perceived that the causes 

of the advantages one country has over another are not all of the 
same kind; but he pointed out with truth that, given the advantages, 
they determine the course of trade. The nature and the cause of an 
advantage become material only when we begin to inquire whether 
it is likely to persist indefinitely, and whether it can be affected by 
legislation. Obviously, a comparative advantage, which rests not 
only on physical causes, but on differences in skill, knowledge of the 
arts, mechanical training, qualities of character and intelligence, may 
be influenced, within limits, by a stimulus in the way of premium or 
protection. The argument for protection to young industries applies 
only under conditions of this latter sort. Given those conditions, it 
may apply more widely than English economists have been disposed 
to grant. Protection to young industries, which Mill believed to be 
of positive advantage only in a young country in the earlier stages 
of growth, may have had occasional and unexpected successes even 
within the last thirty years. The history of the silk manufacture 
illustrates the possible turn of events; and the application of pro- 
tection in the United States has been so sweeping since the Civil 
War that this case, while by no means typical of the usual effects, 
probably does not stand alone. But such exceptions serve here, as 
they do in all scientific investigations, to bring out the foundation 
of a general rule rather than to modify it. In the present case, they 
suggest a more careful analysis of the causes of comparative advan- 
tages in different countries, but do not affect the doctrine that these 
advantages determine the sort of trade and division of labor that will 
take place between them. Such phenomena as have been described 
in the preceding pages still reduce themselves in the last analysis, to 
illustrations of the doctrine of comparative costs. 



XIV. RENT 

178. THE ORIGIN OF AGRICULTURAL RENT' 

There are various problems of economics, particularly some 
connected with taxation, the solution of which depends on a proper 
understanding of the causes and conditions through which rent is 
brought into existence. Further, the continued reappearance in 
current treatises of certain defects of statement which characterized 
the earlier expositions of the true doctrine, make almost necessary 
a careful restatement of that doctrine with especial reference to the 
defects alluded to. 

And, first, we must remind the student that teachers of economics, 
with few exceptions, use the term rent more narrowly than is common 
with the general public. By the latter, rent is thought of as a pay- 
ment made for the privilege of enjoying the use of any material object, 
a piece of land, a house, a boat, or anything you please. As used by 
most economists, on the other hand, rent means only a payment 
made for the use of land — that land, further, being conceived as 
unmodified by human art, or at least modified only in certain very 
fundamental, and substantially unalterable, ways. Thus, when I 
pay $350 a year for the use of a house and lot, $120, perhaps, will be 
conceived as paid for the use of the lot, while $230 is paid for the use 
of the house; in which case only the $120 is true rent, the $230 being 
more properly called hire and consisting of interest, profit, wages 
of management, and a fund for the maintenance of the capital 
involved. In short, rent — economic rent — is a sum paid for the use 
of a natural factor, while hire is paid for artificial, produced factors. 
Doubtless one would often find it difficult, sometimes impossible, 
to distinguish these two things sharply and accurately. But, in the 
main, they are commonly cut apart with a fair degree of precision by 
the automatic working of the laws of price. For example, it is almost 
certain that, of the total tax collected from the owner of a house 
and lot, one portion is really paid by him, while another portion is 
in the end taken from the tenant in the shape of higher rent; and, 
what is more significant for our purpose, it is also quite certain that 

' From F. M. Taylor, Readings in Economics, pp. 181-91. Privately pub- 
lished, 1907. 

60Q 



6io MATERIALS FOR ELEMENTARY ECONOMICS 

the dividing line between these two parts corresponds pretty closely 
to the line which separates that portion of the total value of the place 
which constitutes the value of the lot, from that other portion which 
constitutes the value of the house. 

So much for the meaning of rent in economics; now for its origin. 
Speaking broadly, rent comes into existence exactly like the value of 
any other thing the quantity of which is absolutely fixed; that is, 
it comes into existence because the thing paid for — the use of land — 
has a marginal utility. In other words, if land of a given grade bears 
rent, it is certain that society has a use for every piece belonging to 
that grade— that that piece, among all pieces of the grade in question, 
which is put to the least important use is after all put to some use. 
No piece can be spared. The grade in general has marginal utility, 
importance, significance. But, while in general rent, like similar 
cases of value where the stock of the particular form of wealth is 
absolutely fixed, owes its origin to the marginal utility of that for 
which rent is paid, it is usual in this case to go deeper, to inquire into 
the more ultimate causes of rent, particularly agricultural rent. 
Accordingly, the classic theory as to the origin of rent is a theory as 
to the deeper phases of the process whereby agricultural rent comes 
into existence. 

In presenting the theory, it is perhaps best to begin with the hy- 
pothesis that all the land is of one grade — i.e., can furnish produce 
(wheat we will say) at substantially one cost — and that its productive 
efficiency is absolutely fixed — it can raise, say, 30 bushels of wheat 
at a cost of 30 cents per bushel, no more and no less. Such- a hypothe- 
sis is, of course, in the highest degree unreal, but will serve us best 
in bringing out the essential cause of rent. After this is done, we will 
change the hypothesis into closer accord with facts and show how the 
same cause still operates to produce rent. So, then, let us imagine 
ourselves to be dealing with the small, completely isolated island 
of classical convention. On that island there are 1,000 acres of wheat 
land, each acre of which can produce 30 bushels, no more and no less, 
at a cost of just 30 cents per bushel, not counting any charge for the 
use of land. If all the land is used, the output will then be 30,000 
bushels costing $9,000. 

Such being the purely technical conditions, let us now study the 
economics of the case. Let us suppose that at a certain time the 
demand for wheat at 30 cents is only 2,000 bushels, while it falls to 
1,900 bushels at 31 cents, 1,850 at 32 cents, 1,800 at 33 cents, and so on. 



RENT 6ii 

Under these conditions, could there be any rent? No; for, since 
the possible output of wheat is much greater than the demand at any 
price as high as cost, most of the land will not be used at all, and the 
potential competition of the owners of such land will hinder the owners 
of the land under cultivation from exacting any payment for the use 
of their land. Again, under the conditions supposed, what will be 
the price of wheat ? Answer: it will be just thirty cents. It cannot 
be lower; for in that case wheat would not be produced at all. It 
cannot be higher; for, it being possible at that cost to furnish more 
than is demanded at that price or higher, the competition of producers 
will hold price down to that figure. Finally, these two conclusions 
will still hold so long as demand at 30 cents is anything under 30,000 
bushels, say 5,000, or 10,000, or 20,000, or anything up to 29,999. 

But change slightly the conditions. Suppose that the demand 
increases, so that 31,000 bushels are wanted at 30 cents, 30,000 at 
31 cents, 29,000 at 32 cents, and so on. Under these conditions price, 
plainly, will advance to 31 cents; for only 30,000 bushels can be 
produced and they are all wanted at 31 cents. But, since cost is only 
30 cents, this new price will give farmers a surplus over ordinary 
returns to industry of i cent a bushel or 30 cents an acre. But this 
surplus will naturally invite producers who in other lines are getting 
merely the usual returns of industry to offer to pay the land owner 
something for the right to use the land. The present tenant will 
raise the offer; the outsiders will come back with a higher bid; and 
so on till the competition of the two has caused substantially the whole 
thirty cents to be turned over to the land owner. The surplus thus 
turned over is rent.^ 

Looking back over this case, we see that the immediate cause of 
the rent surplus is the appearance of a price in excess of the cost of 
production. But the cause of this higher price, and so the more ulti- 
mate cause of rent, is to be found in the fact that the demand for wheat 
at a price higher than cost is at least equal to the whole possible output; 
or, put the other end to, in the fact that the possible output is no 

' The above explanation has assumed that land owner and farmer are different 
persons. This, of course, may not be the case. The land owner himself may work 
the land. But such a hypothesis does not alter the result. The fact that, under 
the conditions set forth, price inevitably rises above cost of production brings into 
existence a surplus. This surplus is first received by the farmer, and it remains 
with the farmer if he is also land owner; while, if he is only a tenant, he is driven 
by the free working of competition to turn over that surplus to the one who is the 
owner. 



6i2 MATERIALS FOR ELEMENTARY ECONOMICS 

more than equal to the demand at some price above cost.^ And, with 
slight change, these statements will explain the origin of rent in any 
possible case. 

We have seen how rent originates in the very simple, but very 
unreal, case furnished by our first hypothesis. Let us now change 
the hypothesis so as to bring it a step nearer to the facts of life. To 
do this, we will suppose that the wheat land of our island, instead 
of being all of one grade, is of four grades, though as before the output 
of each acre in each grade is absolutely fixed. Thus, we will assume 
that there are loo acres which will produce each 30 bushels at a cost 
per bushel of 30 cents, 200 acres which will produce each a little under 
26 bushels at a cost per bushel of 35 cents, 300 acres which will pro- 
duce each 22^ bushels at a cost per bushel of 40 cents, and 400 acres 
which will produce each 20 bushels at a cost of 45 cents per bushel. 
In each case, greater expenditure will not increase output at all, 
while smaller expenditure will produce no output. 

When, now, would rent appear, under these new conditions ? If 
the demand for wheat were limited to 2,000 bushels, then, as in the 
previous case, there would be no rent; since to produce that much 
wheat would require only two- thirds of the 100 acres of best land, 
leaving the other third, as also all poorer lands, idle, and the 
competition of the idle 33I acres of best land would shut out any 
charge for the use of the 66f acres actually under cultivation. In 
like manner, the price would be, as before, just equal to cost, 30 cents. 
Manifestly the same propositions would be true, were demand 2,100 
bushels, or 2,200, or 2, 300, or anything less than 3000. But suppose, 
now, that the demand schedule becomes 3,100 bushels at 30 cents, 
3,000 at 31 cents, 2,900 at 32 cents, and so on. At once price must 
rise to 31 cents; for the whole output which farmers can afford to 
raise so long as price is under 35 cents, is wanted at 31 cents. But 
a price of 31 cents gives a surplus over cost of i cent per bushel or 
30 cents per acre on the best land; and this surplus, as in the former 
case, will be driven into the hands of land owners by the competition 
of possible tenants; that is, rent will now come into existence. 

What, now, is the explanation of rent in this case ? Substantially 

' A more common but less precise statement would be this : The ultimate 
cause of rent, in a case like that supposed, would be found in that fact that ihe 
demand for wheat at the cost price exceeded the whole possible output, or the whole 
possible output was smaller than demand at the cost price. This method of putting 
such cases assumes — which doubtless is commonly true — that a demand in excess 
of output at o?ie price means a demand at some higher price equal to output. 



RENT 613 

the same as before. The immediate cause is a rising of price above 
cost of production on the jent-bearing land. But the cause of that 
rising of price, i.e., the more ultimate cause of rent, is the fact that the 
demand at some price above cost is at least equal to possible output 
on the best land, or, turned about, that the output of the best grade 
of land is not greater than the demand at some price above cost. 
In short, it is the limited stock and limited capacity, not this time 
of all land, but of land of the best grade, as compared with the demand 
for wheat, which causes rent. Land being of various grades, a scarcity 
of the best land makes itself felt in raising price and starting rent 
even though land as a whole cannot be said to be scarce. In such a 
case, the existence of rent might be said to depend in a way on the 
fact that lands were of different grades. But the particular implica- 
tion (in that statement) on which rent depends is this, that not all 
the lands are of the best grade, rather than this, that there are inferior 
as well as superior grades. 

The above shows how, in the hypothetical case under considera- 
tion, rent would come into existence. But there is another phase of 
the matter which deserves consideration. Let us suppose the demand 
schedule for wheat to advance by successive steps till it reads as fol- 
lows: 3,000 wanted at 36 cents, 3,100 at 35 cents, 3,200 at 34 cents, 
and so on. What will now happen ? At first sight it might seem that 
price would now become 36 cents; since 3,000 bushels, the whole 
product of the best land, is now wanted at 36 cents. But a new ele- 
ment has come in. According to the original hypothesis, there are 
200 acres which can furnish each 26 bushels of wheat at a cost of 
35 cents. But, by this time, price will have reached 35 cents, for 
3,100 bushels are wanted at that price; consequently farmers can 
profitably work the 35 cent land and will of course begin to do so. 
But, since 5,200 bushels can be furnished off these second grade 
lands, the 3,100 bushels wanted at 35 cents can easily be supplied 
at this price. Price, therefore, will stop at 35 cents, instead of going 
to 36. Further, this would be the case, i.e., price would remain 
stationary at 35 cents, even were demand to increase so that there 
were wanted at 35 cents 3,500 bushels or 4,000 or 5,000 or any number 
short of 3,000 plus 5,200, i.e., 8,200. But, if price remains stationary 
at 35 cents throughout all these changes in demand, then obviously 
the surplus over cost will also remain stationary, and therefore rent 
also will remain stationary. In short, the cultivation of the inferior 
lands acts to check rent — the existence of inferior land is not a 
condition on which the arising of rent depends — as is often said — 



6l4 MATERIALS FOR ELEMENTARY ECONOMICS 

but rather a condition on which the keeping of rent within bounds 
depends. 

In the hypothesis which has just been considered, we had already 
restored one of those two important facts of the real world which, as 
will be remembered, were purposely dropped out of our first hypothe- 
sis. Let us now restore the second of those two facts. Let us sup- 
pose that the possible output of each acre of land, instead of being 
absolutely fixed, varies in some degree with the amount of expenditure. 
Let us suppose, further, that with an expenditure of $9, each acre of 
land reaches the point of diminishing returns. Beyond this, increase 
in expenditure will for a time secure an increase in output but one 
less than proportionate to the increase in expenditure. Thus, sup- 
pose that, while $9 spent on the best land yields 30 bushels, $12 
would yield 38 bushels; $15, 44 bushels; and $18, 47 bushels; after 
which no increase is possible. Similarly for the second grade of 
land, while $9 spent on it yields 26 bushels, $12 would yield 32 
bushels; $15, 34 bushels; and $18, 38 bushels; after which no 
increase could be secured. And so on with the other grades of land. 
Under these conditions, as a little computation would show, when 
price reached 37 cents, output could be increased 800 bushels from the 
best land; when price reached 50 cents, output could be increased 
600 bushels from first grade land and 1,200 bushels from second grade; 
when price reached 75 cents, output could be increased 800 bushels 
from second grade land and 1,200 from third grade land; and so on. 

What, now, will be the effect of these new conditions? Let us 
suppose the demand schedule to have advanced till it reads as follows : 
8,000 bushels wanted at 39 cents; 8,500, at 38 cents; 9,000 at 37 
cents; 9,500, at 36 cents; and so on. Under our former hypothesis — 
that the productivity of each grade of land was absolutely fixed — this 
demand schedule combined with the output schedule would give us 
a price of 38 cents. It could not be above 38 cents; since this would 
cut demand down to at least 8,000, while 8,200 at least could be 
furnished for 35 cents. It could not be below 38 cents; since at that 
figure 8,500 bushels would be wanted and only 8,200 could be 
furnished, and so the competition of the unsuccessful buyers would 
hold it at that point. But, while under the first hypothesis the new 
demand schedule would give us a price of 38 cents, under the second 
hypothesis it would give a price of only 37 cents. For, under this 
second hypothesis, when price reaches 37 cents we can, through the 
more intensive cultivation of the best land, increase output by 800 



RENT 615 

bushels, making a possible total at that figure of 9,000 bushels — 
3,800 from the best land and 5,200 from the second best; and 9,000 
bushels just satisfies the demand at 37 cents and so hinders a rise 
to 38 cents. Thus, the new hypothesis has hindered the price from 
rising as high as it would have risen under the old. But anything 
which hinders price from rising thereby hinders rent from rising. 
That is, the more intensive cultivation of soils already in use checks 
the rise of rent. The principle that even after the stage of highest net 
efficiency has been reached output can be increased though at increas- 
ing cost per unit, furnishes a condition under which rent may be 
checked. In other words, the so-called law of diminishing returns — 
which might better be named the law of increasahle returns at 
diminishing rate — in one of its phases furnishes a possible check on 
the growth of rent; and from this standpoint takes its place along 
with the inferior soils which, as we saw above, play a similar part. 

The discussion just preceding has shown how the law of diminish- 
ing returns acts to check the growth of rent. We can hardly leave the 
matter without remarking emphatically that, looked at in another 
of its phases, this same law is a sine qua non of rent. Because the 
returns from the same piece of land are increasable, therefore a check 
on rent is possible. But, because the possible increase is at a dimin- 
ishing rate, therefore, before the increase which checks rent can take 
place, price must rise above cost on the old plan of cultivation, and 
it is this rising which causes rent. If output could be increased 
indefinitely without any falling off in the rate, there could never be 
any rent; for supply would always keep pace with demand at cost 
price, i.e., without any rising of price above cost. We could have 
rent, were returns absolutely fixed; we do have rent with returns 
fixed by an elastic Hmit, i.e., increasable but at a diminishing rate; 
but we could not have rent, were returns indefinitely increasable 
without any falling off in the rate. 

We have set forth the process by which rent would come into 
existence under each of three different hypotheses, each being modi- 
fied so as to bring it nearer to actual conditions than its predecessor. 
As a matter of fact, even in its third form that hypothesis would, in 
many respects, show not a few differences from those conditions. One 
of these differences gives us a case which is of sufficient importance to 
deserve special consideration. In introducing the condition of different 
grades of land, it was assumed that these grades varied in productivity 
by considerable intervals. The best produced 30 bushels per acre; the 
second best, 26 bushels; the third, 22^ bushels, and so on. But there 



6i6 MATERIALS FOR ELEMENTARY ECONOMICS 

can be little doubt that, in the actual world, lands vary in productivity 
by much slighter differences than these. Still keeping as near as 
possible to our original figures, the best land yields, let us say, 30 bushels 
per acre; the second grade, 29; the third, 28; and so on. (Very likely 
even these differences are too large.) Does this new condition compel 
us to alter our explanation of rent ? Not in any essential feature. To 
simplify matters, let us ignore the output per acre, and simply assume 
that, without pushing cultivation beyond the point of highest net 
efficiency, wheat can be raised on the different grades according to 
the following schedule: on the best, 3,000 bushels at a cost of 30 cents 
per bushel; on the second grade, 5,000 bushels at a cost of 31 cents; 
on the third grade, 7,000 bushels at a cost of 32 cents a bushel; and 
so on — it being assumed also that people do not take account of 
differences smaller than a cent. How, now, would rent come into 
existence? Our previous answers fit easily enough. As soon as 
demand at some price above 30 cents equals or exceeds 3,000 bushels — 
the output from the best land — ^price will rise above 30 cents, thus 
giving a surplus over cost which will be retained by the farmer if he 
is also land owner but which, if he is only a tenant, will be driven by 
competition from his hands into those of the land owner. But what 
part is played by the new possibilities of production at 31 cents, 
32 cents, and so on ? Just such a part as was formerly played by the 
possibiHty of production at 35 cents. Since the output can be 
increased 5,000 bushels just as soon as a price of 31 cents is established, 
then, although the demand schedule may be one which under the 
former hypothesis would have raised price to 32 or t^t, or 34 or 35 
cents and so raised rent to corresponding heights, price may now 
be checked at 31 cents, and so rent kept at i cent a bushel or 30 cents 
an acre. Thus, suppose the demand schedule to be: 3,500 bushels 
at 35 cents; 4,000 at 34 cents; 4,500 at 33 cents; 5,000 at 32 cents; 
5,500 at 31 cents; and so on. Under our former hypothesis, price 
would promptly rise to 35 cents, giving a rent on the best land of 
$1 . 50 per acre. But, under the new h)^othesis, price could not rise 
above 31 cents, since at that price 8,000 bushels can be furnished and 
only 5,500 are wanted; and rent could, in consequence, reach only 30 
cents per acre.^ 

' The conspicuous difference between the earlier case and the one just con- 
sidered is to be found in the fact that, in the latter, cost of production plays a 
part in determining price and so in determining rent, not merely at special 
stages, as in the former case, but all the time. Thus, under the former hypothesis, 
whenever costs on the first and second grade lands are respectively 30 and 35 



RENT 617 

The gist of the above discussion may be set forth in the following 
propositions, (i) Rent in general comes into existence when and 
because the demand for agricultural products at some price higher 
than cost on the best land — said land being cultivated up to the point 
of highest net efficiency — equals or exceeds the output of said land 
so cultivated. (2) Rent on any particular grade of land comes into 
existence when the demand for agricultural products at some price 
higher than cost on the grade of land under consideration, equals or ex- 
ceeds the output on all land having a cost which is smaller than said 
price, the lands in all cases being cultivated to the point of highest 
net efficiency. (3) The detailed process whereby rent comes into ex- 
istence is as follows: demand at some price higher than cost becomes 
at least as great as possible output of best land cultivated to point of 
diminishing returns; this causes price to rise above cost; this gives 
to the farmer a surplus over ordinary returns; the existence of this 
surplus leads to the competition of possible tenants in trying to 
secure the use of the land by paying a price therefor; and this competi- 
tion goes on till the whole surplus is turned over to the land owner as 
rent. (4) Bringing into cultivation inferior soils tends to check the 
rise of rent. (5) Cultivating more intensively soils already in use 
tends to check the rise of rent. 

179. RENT DIAGRAMS 

The accompanying diagrams are intended to illustrate the rents 
due to cultivating, in a given community, different pieces of land 
which offer unequal advantages to the cultivator, through differences 
of fertility, of location, or of both. 

In Diagram I the case is presented from the viewpoint of increasing 
cost of production. In the plane figure YOXB, units of product from 
the best piece of land are measured along OX. OA represents the 
cost of the first unit produced; XB represents the cost of the final 

cents, after price has reached 31 cents and before it has reached 34 cents, it is 
temporarily emancipated from the influence of cost of production altogether. 
During that time, price is solely a question of the marginal utihty of the possible 
output of the best land; and the precise amount of such marginal utility is not at 
all affected by cost. But, when, as in the later hypothesis, the second grade land 
can furnish wheat at 31 cents, third grade land at 32 cents, and so on, then marginal 
utility itself can be determined only as marginal cost is also determined, and so, 
of course, price can be determined only as marginal cost is determined. In fact 
during much of this interval price might temporarily ignore marginal utility 
altogether and follow marginal cost only. 



6i8 



MATERIALS FOR ELEMENTARY ECONOMICS 



or marginal unit, and each point on the ascending curve AB repre- 
sents, by its height above OX, the cost of some intermediate unit of 
product. The area OXBA shows the total cost of the product on 
this piece of land; the area OX BY indicates the total selling-price of 
this product, and the area ABY indicates the amount of rent. 

Similar explanations apply to the analogous figures Y'O'X'B' and 
Y"0"X"B". O'A ' is greater than OA , and 0"A " is greater than O'A ', 
indicating that on inferior lands the initial cost of production is greater 
than on the best land; but the marginal costs X'B' and X"B" are 



Diagram I 




equal to the marginal cost XB on the best land. The line DC may be 
interpreted as the extreme or limiting form of a figure like YOXB, and 
if so interpreted shows the case of no-rent land on which but one unit 
is produced, and on which initial cost coincides with marginal cost. 

Diagram I as a whole may be regarded as a solid figure made up 
of an indefinite number of figures like YOXB, Y'O'X'B', etc., packed 
side by side, each corresponding to a separate piece of the land under 
consideration. Then the constant altitude of the line CB above the 
line DX indicates the constant marginal cost on all grades of land. 
The varying altitude of the line AC above the line OD shows the differ- 
ent costs of the initial units of product raised on lands of different 



RENT 



619 



advantages. The volume of the solid figure DOXBCY represents the 
total price of the product of all'the pieces of land. Of this total, the 
portion represented by DOXBCA is cost of production, and the 
portion represented by CABY is total rent. 

Diagram II presents the same general subject from the view- 
point of diminishing returns. Here, in the plane figure YOXB, units 
of labor and capital applied to the best piece of land are measured 
along OX. OY represents the return to the first dose of labor and 
capital; XB represents the return to the marginal dose, and the de- 
scending curve YB represents the phenomenon of diminishing returns 
to successive intermediate doses. The area YOXB shows the total 



Diagram II 




product of this piece of land; the area AOXB shows what would 
have been the product if no unit of labor and capital had yielded more 
than did the marginal dose. The difference, YAB, indicates the 
amount of rent. 

Similar explanations apply to the analogous figures Y'O'X'B' and 
Y"0"X"B". Y'O' is less than YO, and Y"0" is less than Y'O', 
indicating that on inferior lands the initial return is less than on the 
best land; but the return to the marginal dose of labor and capital 
{XB, X'B', X"B", and, in the limiting case, DC) is the same for any 
grade of land. 

In Diagram II as a whole, the constant altitude of the line BC 
above the line XD indicates the constant marginal productivity of 
labor and capital on all kinds of land. The varying altitude of the line 



620 MATERIALS FOR ELEMENTARY ECONOMICS 

YC above the line OD shows the different degrees of initial produc- 
tivity of lands of different quality. The volume of the solid figure 
OXDCYB represents the total product of all the pieces of land. Of 
this total, an amount represented by the volume OXDCAB would have 
been produced if no labor and capital had yielded more than did the 
marginal doses on the several pieces of land. The difference, repre- 
sented by the volume ABCY, is total rent. 

Note. — In strictness, if Diagrams I and II refer to the same set of conditions, 
and if the curves AB, A'B' , and A"B" of Diagram I are concave to the base of the 
figure, as drawn, the curves YB, Y'B', and Y"B" of Diagram II should be convex to 
the base. But in drawing the diagrams it has seemed best, despite the inconsist- 
ency, to use in each the more familiar concave curve, as it is employed in most 
texts. — Editors. 



1 80. SOME FACTORS AFFECTING LAND VALUES' 

The total value of a city's site is broadly based on population 
and wealth, the physical city being the reflex of the total social 
activities of its inhabitants. Whatever the type of city, growth 
consists of movement away from the point of origin, and is of two 
kinds; central, or in all directions, and axial, or along the water- 
courses, railroads and turnpikes which form the framework of cities. 
Modern rapid transit stimulates axial growth, producing star-shaped 
cities, whose modification in shape comes chiefly from topographical 
faults. 

The factors distributing values over the city's area by attracting 
or repulsing various utilities, are, in the case of residences, absence 
of nuisances, good approach, favorable transportation facilities, 
moderate elevation, and parks; in the case of retail shops, passing 
street traffic, with a tendency towards proximity to their customers' 
residences; in the case of retail wholesalers and light manufacturing, 
proximity to the retail stores which are their customers; in the case 
of heavy wholesaling or manufacturing, proximity to transportation ; 
and in the case of public or semi-public buildings, for historical 
reasons, proximity to the old business center; the land that is finally 
left being filled in with mingled cheap utilities, parasites of the stronger 
utilities, .which give a low earning power to land otherwise valueless. 

' Adapted from Richard M. Hurd, Principles of City Land Values, passim 
(The Record and Guide, 1903), and from the article by the same author in the 
Yale Review for August, 1902. 



RENT 621 

The basis of residence values is social and not economic — even 
though the land goes to the highest bidder — the rich selecting the 
locations which please them, those of moderate means living as near 
by as possible, and so on down the scale of wealth, the poorest work- 
men taking the final leavings, either adjacent to such nuisances as 
factories, railroads, docks, etc., or far out of the city. Certain 
features appear to attract the wealthy in selecting their residence 
district, among these being nearness to parks, a good approach from 
the business center, not too near nor yet too far, a moderate elevation 
if obtainable, favorable transportation facilities, despite the fact that 
the rich ride in their own carriages and automobiles, and above all 
absence of nuisances. Having selected a district the wealthy make 
it their own by erecting handsome residences, making good street 
improvements, restricting against nuisances, and finally and of chief 
importance, living there themselves, the value of residence land vary- 
ing directly according to the social standing of its occupants. The 
main consideration in the individual selection of a residence location 
is the desire to live among one's friends or among those whom one 
desires to have for friends; for which reason there will be as many 
residence neighborhoods in a city as there are social strata. In 
securing a home in a good residence section, a man secures safe, 
healthy, and attractive conditions for his family to live under, and 
in the smaller cities, desirable social life, these social considerations 
explaining the strong pressure in all cities toward the best residence 
sections. The contrast should be noted that business property is 
selected by the man from an economic standpoint, and residence 
property by the woman from a social standpoint. Social growth 
and pressure is upward from class to class, all ranks being continually 
recruited from below — as well as dropping members from time to 
time — and the ultimate aim in residence location is to be as close as 
possible to those of the highest social position. 

Where residences contain more than one tenant, whether tene- 
ments, flats, apartments or hotels, the basis of value is economic 
and conforms closely to the principles governing business property. 
The hotels of various classes seek locations similar to the retail stores 
of the same classes on convenient traffic streets which advertise them. 
The highest-class apartment hotels seek locations on or near such traf- 
fic streets as run through or near the fashionable districts, the rents 
being dependent both upon fashion and on the character and service 
of the building. Below this grade the various classes of flats seek 



622 MATERIALS FOR ELEMENTARY ECONOMICS 

locations for the convenience of their tenants, tending to draw nearer 
and nearer to their tenants' places of business, until finally we reach 
tenements crowded among the factories where their occupants work. 

In modern cities the main currents of business men's travel 
are carried by street railroads, so that the travel consists of short 
trips on foot converging to the street railroads, a long trip in the cars 
to the business center, and there short trips on foot again. In some 
cities where there are hills between the business and residence sections, 
the currents of foot travel follow a zigzag course up and down the 
hill, it being easier to turn corners than encounter grades. A varia- 
tion may occur in the return trip where men stop at clubs, cafes or 
hotel lobbies, the location of these favorite haunts causing a different 
route to be taken, with some resulting influence on values. 

Within the business districts occur the continual interchange 
of visits, by means of which the business of the city is accomplished. 
Here, although the trips are short, the necessity for saving time leads 
to the gathering together of the various forms of business in special 
districts. In large cities the daily trips of workmen are made chiefly 
on foot and are widely diffused throughout the tenement districts, 
with small effect except that certain more convenient streets attract 
cheap shops. 

The daily trips of women are made either for shopping, calling, 
or driving. Here, as in men's trips, the travel consists of short trips 
on foot to the street car lines, which carry the concentrated travel 
to the largest shops, where the cars are left and the women walk to 
the other shops. For the same reason of convenience, women's shops 
are crowded together in order to save time in going among them. 

Transfer points, owing to concentration of daily streams of 
people and consequent opportunity for shops, are strategic points 
in a city's area, creating business subcenters, whose prospects of 
increasing values are limited only by the number and quality of the 
people likely to utilize them. As examples, note the marked effect 
of transfers in New York at Broadway and 34th Street, Madison 
Avenue and 59th Street, Lexington Avenue and 5gth Street; also 
in New Haven at Chapel and Church streets; in Denver at 15th and 
Lawrence streets, and the many transfer points in the outlying 
districts of Chicago. 

Bridges, ferries, and tunnels, which serve as additional outlets 
to a city, co-operate with long distance transportation facilities, 
and any change in their location or any competition of new bridges 



RENT 623 

or tunnels by changing traffic routes cause marked shifting of values. 
Thus the construction of the Brooklyn Bridge by diverting traffic 
from the old Fulton Street ferry, and throwing it half a mile back 
from the river on either side, removed millions of dollars of value 
from the streets leading to the ferries, especially in Brooklyn. 

Where a railroad runs through a business section at grade, it 
limits communication between the divided sections and tends to 
concentrate business on one side of the line. Where a railroad in a 
business section is carried below or above grade, its effect is minimized. 
In a poor residence section a railroad has but little effect, but in a 
high class residence section it forms a nuisance which good residences 
shun. Added to the noise and cinders of passing trains is the fact 
that the railroad attracts factories and warehouses, which are also 
nuisances in a residence district. In some instances the railroad 
travels along the line of a small creek or gully within the city, which 
has already kept land values down, so that the railroad has but 
little added effect, as with the greater part of the Belt Line in Kansas 
City. If the railroad is in a deep cut, its limiting effect on good 
residences is diminished, as in Chattanooga and St. Paul. In some 
cities demand for land in the good residence district is so great that 
the residence district is projected beyond the encircling railroad with 
little fall in values, as in Louisville and Richmond, where handsome 
residences are built adjacent to the railroad. In New York, the 
N.Y. Central R.R. on Park Avenue, between 42d and 56th streets, 
holds the high-class residences on the west side of the track, the east 
side of the track being ruined by absence of approach, the only com- 
munication being by the elevated foot bridges. From 56th Street 
north the tracks enter the tunnel and their effect is lessened, the only 
objection being the vent holes in Park Avenue. In all cities railroads 
detach great slices of city area, in which they alter utilizations and 
values much as important water courses do. 

The display of goods is vital for shops, and in order to display 
gODds shade is necessary; hence the side of the street which is shady 
daring the part of the day in which women shop is normally worth 
from 20 per cent to 40 per cent and occasionally 100 per cent more 
than the sunny side of the street. The west side of streets running 
north and south, and the south side of streets running east and west, 
are shady the greater part of the year from about 12 or i o'clock on, 
permitting a display of goods without fear of fading, and rendering 



624 MATERIALS FOR ELEMENTARY ECONOMICS 

the sidewalk agreeable. The greater part of the purchasing in the 
large shops is done by women of the middle classes, whose household 
duties prevent them from reaching the shops until after ii o'clock. 
The busiest shopping hours are from ii o'clock to 4 o'clock, many 
women taking lunch either in the department stores or in restaurants 
nearby. The women of wealth shop usually in the morning between 
II and 2 o'clock, so that even in their case the west or south side of 
the street has some advantage of shade. In southern cities where 
shade is even more important, the relative value of the four corners 
of two intersecting business streets is well defined, the southwest 
corner being the most valuable, the southeast next, the northwest 
next, and finally the northeast corner. This refers only to retail 
shopping fronts, the corners having a different order of preference 
if desired for other purposes, such as hotels or office buildings. It is 
said that in such northern latitudes as those of St. Petersburg and 
Montreal the sunny side of the street is more valuable than the shady 
side, since it attracts the travel in the long winters. In New York 
some difference can be noted in the tides of foot travel according to 
the time of year, but since for eight or nine months of the year the 
climate is mild, the shops become established on the shady side of 
the street and whatever travel in winter changes to the sunny side 
is not sufficient to draw them over. 

Salt Lake City (population 53,531) is located where the Mormon 
trail through Emigration Pass reached the valley floor of the Great 
Salt Lake, and was laid out to the east of the river Jordan. The 
first dwellings were erected on the block bounded by Third and 
Fourth streets south, and Second and Third streets west, but the 
first store was erected at the intersection of Main Street and First 
South, this corner being now the second in value in the city. The 
Mormon Temple was the center around which the early life of the 
city revolved, and probably the reason that Main Street has always 
been the principal street is because it ran from the city to the temple, 
and to Brigham Young's tithing yard on the adjacent block. 

The chief peculiarity of the original plat is the size of the blocks, 
which are 660 feet square, as compared with normal blocks of about 
300 feet square. This results in one-fourth as many corners in Salt 
Lake City as in the normal city, so that the two good intersections, 
those of Main Street with South First and South Second streets, 
have an abnormal value reaching $1,800 per front foot. The further 



RENT 



625 



results are to concentrate business, on account of the small number 
of streets leading away from the center, and to remove almost all 
the value from a tract 400 feet square at the center of each block, 
since a depth of only 100 to 120 feet can be utilized. Thus we find 
in a distance of 300 feet a drop from $1,800 to $75 a foot, owing to 
the non-accessibility of the interior locations. 




Business Section, Salt Lake City, Utah 

(The figures in this and the following diagram indicate the 

value of corners, per front foot) 

Atlanta (population 89,872) furnishes one of the few examples 
of an inland city whose site is not intersected by a water course. 
In its origin and growth it has been purely a railroad town, the 
Union Depot being practically the starting-point of the city. Two 
main turnpikes were laid out. Marietta and Decatur streets east 
and west, Peachtree and Whitehall streets north and south, whose 



626 



MATERIALS FOR ELEMENTARY ECONOMICS 



intersection has only recently acquired the highest values in the city. 
The bulk of the population first located south of the railroad tracks, 
possibly owing to the location there of the state capitol, county 
courthouse, and city hall, and Whitehall Street, between Mitchell 
and Alabama, still remains the principal women's shopping street. 
The development of Peachtree Street as the one fashionable street 
of the city, drawing theaters, clubs, hotels, and office buildings after 




Business Section, Atlanta, Ga. 



it, has at last moved the point of highest values from south of the 
railroad tracks to north of them. Residence values are high, owing 
partly to the monopoly of fashion held by Peachtree Street, where 
values vary from $200 to $100. The better streets off Peachtree 
Street, such as West Peachtree, Forest Avenue, Ponce de Leon, 
North Avenue, etc., show values running from $80 to $40; the wide 
differences in values for similar land being due not only to topography 
but also to variations in the scale of development. 



RENT 627 

181. RAILROADS AND LAND VALUES' 

The actual increase in the value of lands, due to the construction 
of railroads, is controlled by so many circumstances, that an accurate 
estimate can only be approximated, and must in most cases fall far 
short of the fact. Not only are cultivated lands, and city and village 
lots, lying immediately upon the route affected, but the real estate in 
cities, hundreds and thousands of miles distant. The railroads of Ohio 
exert as much influence in advancing the prices of real property in the 
city of New York, as do the roads lying within that state. This fact 
will show how very imperfect every estimate must be. But taking 
only the farming lands of the particular district traversed by a railroad, 
where the influence of such a work can be more directly seen, there is 
no doubt that in such case the increased value is many times greater 
than the cost of the road. It is estimated by the intelligent president 
of the Nashville and Chattanooga R.R., that the increased value of 
a belt of land ten miles wide, lying upon each side of its line, is equal 
to at least $7 . 50 per acre, or $96,000 for every mile of road, which 
will cost only about $20,000 per mile. That work has already created 
a value in its influence upon real property alone, equal to about five 
times its cost. What is true of the Nashville and Chattanooga road, 
is equally so, probably, of the average of roads throughout the country. 
It is believed that the construction of the three thousand miles of 
railroad of Ohio will add to the value of the landed property in the 
state at least five times the cost of the roads, assuming this to be 
$60,000,000. In addition to the very rapid advance in the price of 
farming lands, the roads of Ohio are stimulating the growth of her 
cities with extraordinary rapidity, so that there is much greater 
probability that the above estimate will be exceeded, than not reached, 
by the actual fact. We are not left to estimate in this matter. In 
the case of the state of Massachusetts, what is conjecture in regard 
to the new states, has with her become a matter of history. The 
valuation of that state went up, from 1840 to 1850, from $290,000,000 
to $580,000,000 — an immense increase, and by far the greater part 
of it due to the numerous railroads she has constructed. This 
increase is in a much greater ratio to the cost of her roads, than has 
been estimated of those of Ohio. 

' From I. D. Andrews, Report on the Trade and Commerce of the British North 
American Colonies (1853), pp. 383-84. House E.xecutive Document No. 136, 
32d Congress, 2d Session. 



628 MATERIALS FOR ELEMENTARY ECONOMICS 

We have considered the effect of raihoads in increasing the value 
of property in reference only to lands devoted to agriculture; but 
such results do not by any means give the most forcible illustration 
of their use. An acre of farming land can at most be made to yield 
only a small annual income. An acre of coal or iron lands, on the 
other hand, may produce a thousand-fold more in value than the 
former. These deposites may be entirely valueless without a rail- 
road. With one, every ton of ore they contain is worth one, two, 
three, or four dollars, as the case may be. Take for example the coal- 
fields of Pennsylvania. The value of the coal sent yearly from them, 
in all the agencies it is called upon to perform, is beyond all calcula- 
tion. Upon this article are based our manufacturing establishments, 
and our government and merchant steamships, representing values 
in their various relations and ramifications, equal to thousands of 
millions of dollars. Without coal it is impossible to conceive the 
spectacle that we should have presented as a people, so entirely 
different would it have been from our present condition. Neither 
our commercial nor our manufacturing, nor, consequently, our 
agricultural interests, could have borne any relation whatever to 
their present enormous magnitude. Yet all this result has been 
achieved by a few railroads and canals in Pennsylvania, which have 
not cost over $50,000,000. With these works, coal can be brought 
into the New York market for about $3.50 per ton; without them, 
it could not have been made available either for ordinary fuel or as 
a motive power. So small, comparatively, are the agencies by which 
such immense results have been effected, that the former are com- 
pletely lost sight of in the magnitude of the latter. 

182. LAND VALUATION' 

Urban economic rent is ascertained by deducting from the gross 
rent of land and building, first, all charges for services, such as heat, 
light, elevators, janitors, agents' commission for collecting rents, etc. ; 
second, taxes, insurance, and repairs, and, finally, interest on the 
capital invested in the building. This interest on the cost of the 
building must exceed the average interest rate by an amount equal 
to the annual depreciation of the building, thus providing a sinking 
fund sufficient to replace the building at the end of its life. To make 

' Adapted from R. M. Hurd, Principles of City Lattd Values, pp. 1-2; 124-32; 
148-56. The Record and Guide, 1903. 



RENT 629 

a correct showing the building must be suited to the location and 
managed with ordinary ability, or the apparent economic rent will 
have little or no bearing on the value of the land. 

The rate of capitalization, turning income into value, is based 
on the average interest rates of all investments and fluctuates with 
them, although within closer limits and more slowly. Wide dif- 
ferences occur in the rates of capitalization of rents from land of 
different uses in the same city, and smaller differences from land 
having the same use in different cities. Where a locality is advancing 
in value, capitalization rates are low, where stationary they are 
normal, and where declining they run very high. After the vital 
factor of prospective increase or decrease of value, the lesser factors 
are stability of rents, ease of convertibility — in part by mortgaging 
or in whole by selling— and character of utilization, as involving the 
rates of depreciation of different classes of buildings. In general, 
the larger the city and the higher the class of property, the greater 
the stability of rents, and ease of convertibility, and the lower the 
rate of capitalization. Differences in rent are plainly apparent, but 
differences in rates of capitalization are frequently overlooked, 
although a very large proportion of value in urban land comes from 
a low rate of capitalization. To illustrate; of two pieces of land 
yielding an economic rent of $10,000 annually, one well located and 
improved with office building or retail shop might sell, excluding 
the building, on a 4 per cent basis, or for $250,000; while the 
other covered with cheap tenements, might sell, excluding the 
buildings, on a 10 per cent basis, or for $100,000. The rate of 
capitaHzation is ascertained by figuring backwards, i.e., dividing 
average prices paid for similar land by the net income, which 
shows the interest rate which the community is satisfied to receive 
on such investments. 

Taking as gross rents the amounts actually received and not the 
full rental value, from which an allowance for vacancies must be made, 
we may note first the great difference in the proportion of operating 
expenses according to the class of property, this varying from 10 per 
cent for one or two story brick store buildings, up to 50 per cent for 
office buildings or apartment houses. 

Explaining this difference is the fact that in office buildings and 
apartment houses, from 20 per cent to 25 per cent of the rent repre- 
sents the payment for services, such as light, heat, elevator, janitors, 
cleaning, etc. If from gross rentals all service charges are deducted. 



630 MATERIALS FOR ELEMENTARY ECONOMICS 

the other charges, taxes, insurance, repairs and rent collecting, 
approximate in percentage quite closely in all classes of property. 

Average taxes vary somewhat in different cities. Taxes on 
individual properties in the same city vary more sharply owing 
to irregular assessing by tax officials. Figuring the average of a 
large number of American cities, taxes range from ij per cent to 
1 1 per cent of actual value, the chief exceptions being in Washington, 
where taxes amount to 6-10 per cent (the U.S. government paying 
half the taxes), and in San Francisco, where taxes amount to 8-10 
per cent (the city having no bonded debt). The chief errors of 
assessors come from their overestimate of external appearances and 
from the habit of following former assessment rolls, so that quite 
uniformly property which has been valuable but which is deteriorat- 
ing is assessed higher than property in the line of growth and yielding 
larger rents. 

The cost of insurance is usually so slight that it can be disre- 
garded in making up the budget of annual expenses. Rates range 
from 15c. to 30c. per $100 per annum for first-class risks in the 
larger cities, 50c. to 75c. per $100 on first-class risks in the smaller 
cities, $1.00 per $100 on stores and office buildings in the smaller 
cities, and so on up. 

Leases vary in their provisions as to payment for repairs by 
landlord and tenant, but if paid by the tenant the rent is propor- 
tionately reduced. Average repairs vary from one-half of i per cent 
of the value of the building per annum in the case of the highest 
type of fireproof buildings, i per cent for ordinary mercantile build- 
ings, 2 per cent for older property or that of cheaper construction, 
3 per cent to 4 per cent for old tenements, and so on up in proportion 
to the age, character of construction, and lack of care of the buildings. 

The cost of rent collecting averages from 2I per cent to 3 per 
cent of the rent receipts in the larger cities, according to the class 
of property, and about 5 per cent in the smaller cities, according to 
the class of property. Owners who are competent to manage real 
estate may save agents' commissions by so doing, but instances are 
not uncommon, especially as to large business property, where 
owners managing their own property lose their time and from 20 per 
cent to 30 per cent of the income which an expert rental agent could 
have obtained. 

An estimated scale of proportion of total operating expenses 
and net rents would be as follows, the cost of services where rendered, 



RENT 



631 



as in office buildings, apartments and some tenements, being included 
in expenses: 




Net rents 



Low retail or wholesale buildings 

Residences 

Non-elevator office buildings 

Tenements, non-elevator and elevator 

Elevator apartments 

Fireproof office buildings 



90-7570 
80-70 

75-65 
75-55 
60-45 
60-45 



It is clear that the lower the cost of the building in proportion 
to the value of the land, the nearer the income approaches to pure 
ground rent, against which the sole charge is taxes. On the other 
hand, the more expensive the building the higher the maintenance 
cost, owing both to the greater number of services rendered and to 
the higher standard of accommodation. Since the operating expenses 
of a building, whether fully or only partly occupied, vary but slightly, 
the larger the proportion of expenses to gross rentals the more marked 
will be the rise or fall of net rentals as gross rentals fluctuate. Ordi- 
narily, expensive office buildings are properly located, the chief errors 
being in the erection of expensive buildings in small cities, or in poor 
locations in larger cities. When hard times cause a sharp drop in 
rents in the smaller cities, instances have been known of the upper 
floors of such buildings not earning sufficient rent to pay for the mere 
services rendered, so that it would pay for owners to close the build- 
ings above the ground floor, even though the ground floor stores are 
in active demand. The danger to owners of heavy fixed charges 
is shown in the following table: 



With percentage of 

expenses to gross' 

income 

10% 

20 

30 

40 

50 

60 



If gross 

rents rise 

or fall 



Then net 

rents rise 

or fall 



If gross 

rents rise 

or fall 



Then net 

rents rise 

or fall 



If gross 

rents rise 

or fall 



Then net 

rents rise 

or fall 



20% 

20 

20 

20 

20 

20 



22% 

25 

29 

33 
40 



40% 

40 

40 

40 

40 

40 



44% 

50 

s6 

66 

80 



60% 

60 

60 

60 

60 

60 



66% 

75 

85 
100 
120 
150 



The next charge against gross rents is for interest on capital 
invested in the building, this being figured at the same rate as the 
capitalization of the ground rent, after an allowance for depreciation 
has been made. 



632 MATERIALS FOR ELEMENTARY ECONOMICS 

The final residuum constitutes the economic or ground rent, 
which represents the competitive premium paid for location. Where 
there is no residuum of ground rent in city land it does not follow 
that the land has no value, but usually that the improvements are 
not suitable, so that the value must be estimated under a different 
utilization. If the improvement is a suitable one, absence of ground 
rent may be due to temporary drop in rentals or bad management, 
all city land normally yielding some ground rent. 

With an established economic rent, the sole remaining factor 
to transform this into intrinsic value is the rate of capitalization. 
As capitalization rates vary with securities, Government bonds sell- 
ing below a 2 per cent basis, railroad bonds and stocks on a 3I per 
cent to 5 per cent basis, and industrials on a 7 per cent to 10 per cent 
basis, so the rates of capitalization of urban rents vary from 4 per 
cent for the highest class property in the largest cities, to 5 per cent 
and 6 per cent for second-class property in the same cities, or for 
first-class property in smaller cities, 7 per cent, 8 per cent and 10 per 
cent for tenements in the largest cities, and 12 per cent to 15 per cent 
for temporary utilizations or disreputable purposes in the smaller 
cities. The great power of capitalization rates on values is due to 
the fact that for every change of i per cent in the rate of capitaliza- 
tion, values may change from twelve to twenty-five times the dif- 
ference in interest. For example, a property with a net income of 
$10,000 would sell on an 8 per cent basis at $125,000, on a 6 per cent 
basis at $166,000, and on a 4 per cent basis at $250,000. The lower 
the capitalization rate the greater the effect of any change of values: 
For example, a fall from 8 per cent to 7 per cent adds but 14 per cent 
to the value of the property, while a fall from 5 per cent to 4 per cent 
adds 25 per cent to the value of the property. Moreover, as large 
interest rates apply to the largest properties all further fractional 
lowering of low interest rates results in an enormous mass of values. 
The marked difference between capitalization rates of high class 
and low class property in the same city indicates the large number 
of people who desire to own high class property, and the few who 
desire to own low class property. The reason for such preference 
is that with high class property, rents are more stable and easily 
collected, the property is more quickly and certainly convertible, 
it can be mortgaged at a lower rate of interest and for a larger per- 
centage of value, the buildings depreciate much less rapidly and the 
prospects of increase in value are better. 



RENT 633 

That land, even of the highest type and in the largest cities, is 
a slow asset, is due to a number of causes, among them being the 
fact that land is not easily passed from hand to hand as are stocks 
and bonds, land involves personal or directly deputed management, 
where stocks and bonds do not, there is no Exchange with daily 
quotations giving the values of land, as with stocks and bonds; and 
finally the value of land is influenced by many complex changing 
factors, whose effects are differently estimated by different people. 
Because land is a slow asset, convertibility, or certainty and speed 
in selling it, produces a high premium for the best property by lower- 
ing its capitalization rate. 

To look at the problem from the individual standpoint, in attempt- 
ing to state the value of any single property, the inquiry would seek 
first, upon what forces does the city itself depend, how permanent 
are they, how diversified, are they strengthening and what is the 
resulting index figure, to wit, the rate of increase of the city's popula- 
tion; next, what are the characteristics of the section of the city in 
which the property is located, its past history, its present stability, 
its future prospects; what is the central strength of the property, 
how near the main center of the city or the various subcenters of 
attraction; what is its axial strength, the quantity, quality and 
regularity of the passing travel, what is the character of building on 
the property as to suitability, planning, physical condition, prospect 
of changing utility, management, convertibility, gross and net income; 
at what prices have surrounding property been selling, are they 
rising or falling, and do they suggest any factors not yet taken into 
account; is the property liable to be injured or benefited by changes 
in the building laws; is there any special enterprise or strength on 
the part of the owner or of surrounding owners likely to affect the 
property; what would be the probable effect of any inventions or 
improvements in transportation or the construction of buildings, 
and, finally, what are the general commercial conditions as affecting 
the earning power of tenants, actual or prospective, and financial 
conditions as affecting the capitalization rate. 

The problem is never a simple one, being as complex as city life 
itself, but it is not insoluble, since the forces creating cities are governed 
by uniform laws, like causes producing like results, apparent excep- 
tions being due to the influences of factors not reckoned on. The 
popular impression that the ability to forecast future movements of 
city growth points a quick way to fortune is an over estimate, since 



634 MATERIALS FOR ELEMENTARY ECONOMICS 

real estate movements are slow, large capital is required to handle 
it, carrying charges are heavy, and even though the forecast may be 
ultimately correct, the rate of movement is uncertain, depending on 
the operation of vast economic forces impossible of exact prediction. 

If business expands and population increases in a city, the sum 
total of land values is certain to increase. All the land, however, 
will by no means increase in value, the great mass of medium busi- 
ness and residence property advancing but slowly since it supplies 
the wants of a large number of people of moderate earning power 
who cannot pay beyond a certain price. Coincident with the gradual 
lifting of values as population becomes more dense, decaying sections, 
left behind in the onward march, drop down the scale of inferior 
utilities and values, sometimes to the point of extinction. Such 
worn-out property exhibits in its dilapidations both absence of utility 
and public confession of that fact. If population and business 
become stationary the sum total of land values will decrease in pro- 
portion to the previous discounting of future growth, subsequent 
movements consisting of redistribution of value, as one part of the 
city or another, or one individual or another, flourishes or declines. 

The principal causes of the redistribution of value in all cities 
are, increase in population and wealth, especially in causing reloca- 
tion or extension of the best residence district, changes in transporta- 
tion, such as new surface, elevated, or underground lines, new bridges, 
tunnels, ferries, and railroads, and the readjustments of new utilities 
in new areas harmonizing the complex contending factors. 

183. CAR-FARES AND SUBURBAN SITE-VALUES^ 

If we consider the normal working-class family as containing four 
or five persons, as I think is reasonable, and assume a five-cent fare 
to carry them from their suburban homes to their work, you must 
add, as I calculate it, $600 to the cost of their house and lot to repre- 
sent the capitalized value of one trip every working-day of the year, 
say 300 days for one member of that family. And if, as I think is 
also reasonable, we assume that on the average two of every family 
are wage-earners, and consequently must take that daily trip, we have 
at once the sum of $1,200 representing capitalized transportation 
expenses to add to the actual cost of the house and lot in which we 

' Adapted from Grosvenor Atterbury, "Garden Cities," in Housing Problems 
(Proceedings of the National Housing Association), II (191 2), 107-8. 



RENT 635 

propose to put them in the suburb, as against the city tenement from 
which we are supposed to take them, where the workers can walk to 
and from their place of work. 

Now see what this means. I think it is fair to assume that in the 
neighborhood of a great city, within the five-cent radius, an hour's 
ride, a lot such as we consider a minimum garden city lot, say 30 feet 
by 100, will cost between $750 and $1,000. One may get it for less 
than that, but if so, he probably gets surrounding conditions which are 
inimical to the purposes we have in mind. You put upon a lot, which 
we will assume as costing when improved $1,000, a house which will 
cost from $3,000 to $5,000. I am speaking now of eastern cities like 
New York. But while the figures vary in different sections of the 
country, this ratio remains pretty constant, and the point I am trying 
to demonstrate I think holds. 

In other words, we have an investment ranging anywhere from 
$3,500 to $6,000, and, because it is removed by a five-cent fare from 
the place where the wage-earner goes to his work, we must add from 
20 to 35 per cent to obtain the real basis of interest charges for that 
property, since to live in it the family must pay a sum equaling the 
interest on the additional $1,200. If it becomes a ten-cent fare, this 
amounts to an increase of 40 to 70 per cent. If the fare is as high 
as fifteen or twenty cents to take the worker to his work and back the 
cost of the house and lot in this sense is practically doubled. 

184. THE VALUE OF A CHICAGO QUARTER- ACRE, 1830-94^ 

Probably the most striking illustration ever made of the pecuni- 
ary advantages of social growth which attach to land well situated 
to command public benefits was presented at a dinner of the Chicago 
Real Estate Board, in November, 1893, by F. R. Chandler, a real 
estate expert of long experience, whose integrity and conservative 
judgment give to his statements exceptional importance. It con- 
sisted of a table showing the economic history, year by year from 
1830 to 1894, of the most valuable quarter acre of land in the city 
of Chicago. This table is a genuine contribution to economic data. 

Mr. Chandler's preparatory labors were arduous and conscientious. 
He first searched for the prices at which numerous valuable sites in 
the business center of the city had been sold since 1830; and though 

' From Eighth Biennial Report of the Bureau of Labor Statistics oj Illinois 
(1894), pp. 276-79. 



636 MATERIALS FOR ELEMENTARY ECONOMICS 

no single site had been transferred often enough to indicate its annua 
changes of value, the great mass of statistics which Mr. Chandler 
collected as to prices in the neighborhood of every lot that came within 
the range of his examination, together with the prices of each such lot 
itself, enabled him to fairly estimate the land value of that neigh- 
borhood. By applying this method to several of the more valuable 
neighborhoods of the business section, and confirming his estimates 
by reference to public records, private archives, and market reports, 
he ascertained the different values at different times. Mr. Chandler 
then obtained the opinions of 100 of the best posted real estate men 
in Chicago as to the most valuable quarter acre in the city. Pre- 
ponderance of opinion settled upon the southwest corner of State 
and Madison streets, part of the school fund property controlled by 
the Board of Education. This had never been sold, but with the 
information he had already collected regarding the prices of neighbor- 
ing property, Mr. Chandler was able to determine the value of the 
quarter acre in question for each year from 1830 to 1894. This is 
the property to which the table relates. 

But for the figures showing the number of improved average Illi- 
nois farms,'' and the numbers of days' or years' work at unskilled labor" 
that would have been necessary each year to buy this quarter acre, 
the following table (p. 637) is as Mr. Chandler constructed it, the 
barometrical changes referring of course to business conditions. 

Here we find this quarter acre of raw prairie land near the mouth 
of the Chicago river, worth in 1830, when the population of Chicago 
numbered fifty people, but $20 in money, or 13^ days' unskilled labor. 
It would not then have exchanged for one one-hundredth part of an 
average Illinois farm of the present time. With population increasing 
and business promising, this quarter acre rose in value year by year 
until, in the "boom" of 1836, it was worth $25,000. At that time it 
would have taken fifty-five years' unskilled labor to buy it, and it 
would have- exchanged for twelve average Illinois farms of the present 
time. But the panic came in 1837, and this quarter acre fell to almost 
one-tenth of its "boom" value. Throughout the succeeding business 
depression it continued to fall until 1842, when it reached bottom at 

'The average size of farms — 62.38 acres, and the average value — $32.87 
per acre, are taken from the report of this Bureau for 1890, p. 257. 

* Unskilled labor is estimated at $1 . 50 a day for each year of the period. Part 
of the time it was less, and part of the time more; but this sum will be recognized 
as fair for the purposes of the comparison. 



RENT 



637 



Changes ol Barometer 





n! 


Popula- 


a -a 


tion of 




Chicago 


3- 




^^ 




< 


SO 




100 


100 


200 


100 


3SO 


75 


2,000 


467 


3.26s 


60 


3,820 


17 


4,179 


10 


4,000 


-4 


4,200 


5 


4,470 


6 


S.ooo 


12 


6,000 


20 


7,589 


25 


8,000 


6 


1 2,088 


SO 


14,169 


16 


16,859 


18 


20,023 


25 


23,047 


15 


28,269 


22 


34,000 


22 


38,754 


14 


60,662 


60 


65,872 


9 


80,023 


23 


84,113 


5 


93,000 


II 


91,000 


— 2 


9S,ooo 


4 


109,000 


15 


120,000 


10 


138,000 


15 


160,000 


16 


169,353 


6 


178,900 


6 


200,418 


12 


220,000 


10 


252,054 


IS 


272,043 


8 


298,977 


9 


325,000 


9 


367,396 


13 


380,000 


3 


395.408 


4 


400,000 


I 


407,661 


2 


420,000 


,3 


436,731 


4 


465,000 


7 


503.298 


8 


530,000 


5 


560,693 


6 


590,000 


6 


629,985 


6 


700,000 


II 


825,880 


i« 


850,000 


3 


875.500 


3 


900,000 


3 


1,098.570 


22 


1,200,000 


10 


1 ,300,000 


9 


1,400,000 


8 


1,500,000 





Value of 

Quarter 

Acre 



3 o 

hi V 

< 






Number 
of Average 

Illinois 
Farms at 
$2,050, Ne- 
cessary to 
Buy the 
Quarter 
Acre 



Number of 
Days' Work 

at $1 . so a 
Day, Neces- 
sary to Buy 

the Quar- 
ter Acre 



Number of 
Years' Work 
at $1.50 a 
Day and 300 
Days to the 
Year, Neces- 
sary to 
Buy the 
Quarter 
Acre 



$20 

22 

30 

50 

200 

5,000 

25,000 

3,000 

2,500 

2,000 

1,500 

1.250 

1,000 

1,100 

1,200 

5, 000 

15,000 

12,000 

13,000 

15,000 

17,500 

20,000 

25,000 

30,000 

35.000 

40,000 

45.000 

35>ooo 

30,000 

29,000 

28,000 

28,000 

' 32,000 

33.000 

36,000 

45 ,000 

57,600 

65,000 

80,000 

90,000 

1 20,000 

100,000 

125,000 

100,000 

95.000 

92,500 

90,000 

90,000 

95.000 

119,000 

130,000 

145,000 

175,000 

238,000 

250,000 

2 75,000 

325,000 

•435,000 

600,000 

750,000 

900,000 

1,000,000 

1,000,000 

1,000,000 

1,250,000 



10 

40 

67 

300 
2400 
400 



25 



36 



0.009 

O.OIl 

o.ois 
0.024 
0.098 

2.44 

12.2 

1-47 

1.22 

0.97 

0.73 

0.61 

0.49 

0.54 

0.59 

2.44 

732 

S.85 

6.34 

732 

8.54 

9.76 

12.2 

14-63 

17.07 

19-51 

21-95 

17.07 

14-63 

14-15 

13-66 

13-66 

15.61 

16. I 

17.56 

21.95 

28.1 

3171 

39.02 

43-9 
58.54 
48.78 
60.73 
48.78 
46.39 
45-12 
43-9 
43-9 
46.39 
58-05 
63.41 
70.73 
85-37 
116. 1 
121.9s 
134. IS 
158.54 
212.2 
292.2 
365.85 
439-02 
487-8 
487.8 
487-8 
609 . 76 



13.33 
14.67 



33-33 
133-33 



II. II 

55.56 

6.67 

5.56 

4-44 

3-33 

2.78 

2.22 

2.44 

2.67 

11.11 

33-33 

26.67 

28.89 

33-33 

38.89 

44-44 

55 -56 

66.67 

77-78 

88.89 

100 

77-78 

66.67 

64.44 

62.22 

62.22 

71.11 

73-33 

80 

100 

128 

144.44 
177-78 
200 
266.67 
222.22 
277.78 
222.22 
211.11 
20s . 56 
200 
200 

211.14 

264.49 

288.81 

322.22 

388.89 

528.89 

556.56 

611 .11 

722.22 

744.44 

1.333-33 

1,666.67 

2,000 

2,222.22 

2,222.22 

2,222.22 

2.777.78 



Auihorit\ ol Real Estate Board Valuation Committee. 



638 MATERIALS FOR ELEMENTARY ECONOMICS 

a value of $1,000, which was five times as much, however, as its value 
just before the ''boom" began. 

With the return of better times in 1843, and an increase of popu- 
lation, the quarter acre began again, though timidly, to rise in value; 
but in 1845, with a largely increased population, it had risen to $5,000 
and in 1846, in the second "boom," to $15,000. The "boom" was 
followed as usual by a panic, and notwithstanding an increase in 
population of 18 per cent, the value of the quarter acre dropped to 
$12,000. The collapse of this "boom," it will be observed, left the 
property at a value twelve times higher than the point to which it 
had dropped upon the collapse of the previous "boom." 

The gold discoveries and a continual growth in population revived 
the value slightly in 1848. From that time on it rose rapidly to a 
culmination of $45,000 — equal to twenty-one average Illinois farms 
of the present time, and 100 years of one man's labor — in the "boom" 
year of 1856. The panic of 1857 at once brought it down to $35,000 
and the succeeding period of hard times continued to reduce it until 
in 1861 it was as low as $28,000. But from this point it steadily 
rose through the war and the brisk times that followed, and even 
through the period of the great fire, until 1872, when it was worth 
$125 ,000. Once more there came a panic and a depression, out of which 
this quarter acre emerged in 1878 with a value of $95,000 — nearly 
four times its value on the crest of the first "boom," six times its 
value on the crest of the second, and twice its value on the crest of 
the third. 

With the return of better times in 1879 the value of the quarter 
acre sprang forward once more, and since that, through good times 
and bad, it has gone steadily on. In the "boom" year of 1890 it 
was worth $900,000. The next year it went up to $1,000,000, where 
it remained until 1894, when its value was estimated at $1,250,000. 

Six hundred average Illinois farms would not now exchange for 
that quarter acre of raw prairie land, and nearly 3,000 years of the 
labor of one man would be required to buy it. If 500 years before 
the Christian era, some man had obtained employment at the equiva- 
lent of $1 . 50 a day, had, like some Wandering Jew, been preserved 
through all the vicissitudes of the centuries, had been miraculously 
sustained without expense for any of the necessaries or luxuries of 
life, had done his work regularly from that day to this, 300 days in the 
year without losing a day, and had hoarded all his wages, his savings 
would not yet be enough to buy this quarter acre of prairie land at the 
mouth of the Chicago river. 



RENT 639 

The conservative character of Mr. Chandler's estimate is demon- 
strated by examination of the ground leases of land lying in the 
neighborhood of the quarter acre to which his table relates. 

185. EXAMPLES OF REAL ESTATE TRANSACTIONS' 

a) Max Goldstine, who has acquired much property by purchase 
and long term lease in the past year, has added to his holdings in the 
block in Clark street, between Washington and Madison streets, by 
leasing from Mary J. Hoxie and David G. Hamilton the premises on 
the west side of the street for 99 years from May i, 191 1, at a net 
annual rent of $6,000 for the first five years and $6,500 for the 
remainder of the term. 

The lot is 195X80 feet. Capitalizing the rent on a 4 per cent 
basis it gives $162,500, which is at the rate of $102 a square foot, or 
$8,200 a front foot. The board of review valued the property at 
$89,650, of which $5,050 was in the old four story building on the 
premises. Mark Levy & Bro. were the brokers. 

Several months ago Mr. Goldstine, through the same brokers, 
leased from John T. Boddie the property adjoining on the south, 
40.5X80, for 99 years at an annual rent of $13,000 so that he now 
has a holding 60.25X80 feet. Mr. Goldstine is to erect a new fire- 
proof building prior to May i, 1922, to cost not less than $150,000. 

It is interesting to note that in 1844 Joel Manning purchased the 
whole lot 8, fronting 80 feet on Madison street and 196 feet on Clark 
street, for $1,500. 

h) The property at the southwest corner of South Water and 
Dearborn streets was first sold by the estate of Simon Reid to Henry 
Botsford and then leased for a term of 99 years to Frank and Lawrence 
Cuneo, who occupy it with their business. It fronts 43 feet on South 
Water Street with a depth of 50 feet on Dearborn, and is improved 
with a four story and basement building. 

Mr. Botsford paid $127,000 for the property and then leased to the 
Cuneos at an annual rent of $6,435, they paying $10,000 for the build- 
ing. J. A. Briggs & Co. represented the purchaser and the lessees 
in the transaction, while Howard Grey represented the Reid estate. 

CapitaHzing the ground rent on a 4 per cent basis gives $160,875, 
or over $74 a square foot. The board of review valued the property 
at $117,130. 

' From the Chicago Daily Tribune, February 2?>, 191 1. 



XV. WAGES 

1 86. LABOR AS A SOURCE OF INCOME' 

For the purposes of this essay, the income of an individual is the 
aggregate of economic goods which in the course of a unit of time 
become available to him for final consumption without entailing 
impairment of his capital. Unless otherwise stated, the time unit 
is the year, and the income is expressed in terms of money. So 
defined, personal incomes are derived from three sources: from 
labor, from the ownership of property, and from the rights of private 
property. 

"Labor is a wealth-creating effort."^ Any human exertion 
directed primarily toward the creation of utility, is labor. Although 
the work of a child at school may create "productive power," the 
immediate end not being production, it is not economic labor. "The 
remuneration of labor,"'' "the earnings assigned to men for their 
work, "4 in other words, the recompense of human exertion in the 
production of utility is wages. Thus in the economic sense wages 
includes more than is popularly understood by the term, includes 
all material incomes which reward labor. Theoretically every one 
of the thirty million Americans engaged in gainful occupations 
either actually receives or should impute to himself wages. The 
salary of the president of the United States Steel Corporation, the 
profit of the underwriter, and the pay of the laborer fall in the same 
category. These examples, however, illustrate the three varieties 
of wages. 

Perhaps it would be better to say that there are two classes of 
wages, one of which may be subdivided. In the first place, the 
amount of remuneration may be determined in advance by definite 
agreement. Such a stipend is a salary if the contract is for a year 
or more, wages (in the popular sense) if the time unit is less than 

' Adapted from F. H. Streightoff, The Distribution of Incomes in the United 
States, pp. 27-33. Columbia University Studies in History, Economics, and Public 
Law, Vol. LII, 191 2. 

=> J. B. Clark, Essentials of Economic Theory, p. 9. 

3 Seligman, Principles of Economics, p. 411. 

^ Seager, Introduction to Economics, p. 222. 

640 



WAGES 641 

twelve months/ Although, perhaps, not strictly included by the 
definition, what are generally known as piece payments are rightly 
classed with wages proper for two reasons: First, the piece rate is 
usually determined in the beginning by what a normal operative 
produces in a given period, and is frequently reduced if this standard 
is much exceeded;* second, the tasks of the piece worker, and his 
social position, correspond very closely to those of the time worker. 
The other class of rewards of labor includes those forms of compensa- 
tion which depend in a peculiar degree upon the skill, energy, and good 
fortune of the recipient. Under this head would fall, for example, 
the commissions of salesmen and of brokers, the "profits" of the 
farmer and shop-keeper (except interest on capital), the incomes of 
physicians and lawyers, and a large part of the speculator's gain. 
Although there seems to be no recognized name for this group of 
indeterminate remunerations, for convenience, and without essential 
inaccuracy, it may be styled "contingent earnings." The income of 
a particular individual may vary but little from year to year and still 
be in a proper sense "contingent." This distinction is by no means 
fanciful, for, in addition to the economic significance, there are corre- 
sponding lines of social cleavage. In society the salaried man seems 
to occupy a higher position than the wage earner, regardless of the 
comparative size of their incomes; in the four hundreds, are the 
families enjoying contingent earnings. Doubtless this social grada- 
tion is partly due to the distribution of property: the wage- worker 
is seldom a large owner, the salaried person may not possess property 
but often does, and a prime requisite for the enjoyment of a con- 
tingent income is frequently the control of some capital. 

That one man may procure labor incomes of all three classes 
should require no explanation. A professor, for instance, may be 
paid a salary for teaching, he may be given a weekly wage for summer 
work in a government bureau, and may in addition be blessed with 
large checks for scientific articles, or fees as a consulting expert. 
Thus one person may receive a salary, wages, and a contingent 
income. 

Recognizing, then, this demarkation of the rewards of labor 
into wages, salaries, and contingent earnings, the question of the 
relative importance qf these groups arises. Although no attempt 

' Abstract of the Twelfth Census, p. 300, note 2. 

^ Adams and Sumner, Labor Problems, p. 264; Twelfth Census, Employees 
and Wages, p. xix. 



642 



MATERIALS FOR ELEMENTARY ECONOMICS 



has ever been made in the United States to gather statistics upon 
the basis of such a classification, an approximation may be obtained 
from the data in the Census of Occupations and in the Census of 
Manufactures. The latter distinguishes between "firm members," 
"salaried employees," and "wage-earners." In the light of this 
information, and of a general knowledge of the modes of remunera- 
tion in the various branches of industry, it is possible to form a 
rough table. 

Classification of Recipients of Incomes from Labor in the 
United States, 1900 



I 


II 


III 


IV 


Division of Industry 


Wages 


Salaries 


Contingent 
Earnings 


Agricultural pursuits 


4,863,000 
6,000 
5,154,000 
2,317,000 
6,001,000 


18,000 

819,000 

131,000 

1,079,000 

403,000 


5,557,000 


Professional service 

Domestic and personal service .... 
Trade and transportation 


440,000 

409,000 

1,382,000 


Manufacturing* and mechanical . . . 


709,000 


Totals 


18,341,000 


2,450,000 


8,497,000 



♦Proprietors and firm members, 708,623; salaried officials, clerks, etc., 397,092; wage-earners 
(average number), 5,314,539. Abstract of the Twelfth Census, p. 300. 

From this it would appear that, of the twenty-nine million persons 
gainfully employed in 1900, about six-tenths were wage-earners, 
nea,rly one-tenth were on salaries, and approximately three-tenths 
enjoyed contingent incomes.^ In this connection it is interesting 
to note that the salary seems to be gaining in favor over the wage 
as a form of remuneration. 

The second source of income is the ownership of property. The 
yield of lands and houses, the return from capital — whether invested 
in mortgages, bonds, stocks, partnerships, or individual businesses — 
royalties, and other less important forms of revenue, in fact all that 
the economist calls rent, interest, and profits, are included in this 
class. Profits belong to the owner of a business, whether or not he 
owns the capital or manages the concern. In its pure form, income 
from property ownership accrues, for example, to one whose fortune 
consists of stocks and long-term bonds, one who receives dividends 

' It is interesting to note the rough agreement between these results and the 
estimate of Professor Seager— employing class, 9,830,000; employed class, 19,- 
100,000. 



WAGES 643 

and interest without the necessity of reinvesting; or to a person who 
leaves the administration of his wealth entirely in the hands of an 
agent, trustee, or attorney. If, however, the individual speculates 
on the exchange, rents his own houses, purchases short-time mortgages, 
tills his farm, or conducts his store, then his income is derived from 
two sources, labor and the ownership of property. However clever 
he may be, without the control of property, the speculator can not 
carry on his business, and so, although his skill enormously increases 
his earnings, they are due in part to capital, are not pure economic 
wages. There seems to be a considerable number of men, who, 
with a small sum of, say, ten thousand dollars, by devoting their 
entire time to the stock market, extract annual incomes of an approxi- 
mately equal amount. By way of contrast, it is not an extremely 
infrequent phenomenon for the proprietor of a business to continue 
year after year with a net income less than his capital would earn 
if otherwise safely invested. His wages are either negative, or else 
they are entirely psychological and consist of the pleasure of being 
an entrepreneur; considering the situation from another viewpoint, 
his wages are ample, but his investment bears scant interest. Thus 
it is apparent how difficult may be the attempt to distinguish between 
income from the ownership of property and income from labor — in 
practice they are frequently inseparable. 

Incomes of the third class are neither the rewards of labor, nor 
the returns to the owner of productive property. For want of a 
better term, they may be said to arise from the right of private property; 
they include, mainly, gifts, bequests, and inheritances. 

187. TWO EARLY THEORIES OF WAGES 

(a) A COST OF SUBSISTENCE THEORY OF WAGES' 

Labor, like all other things which are purchased and sold, and 
which may be increased or diminished in quantity, has its natural 
and its market price. The natural price of labor is that price which 
is necessary to enable the laborers, one with another, to subsist and 
to perpetuate their race, without either increase or diminution. 

The power of the laborer to support himself, and the family 
which may be necessary to keep up the number of laborers, does not 
depend on the quantity of money which he may receive for wages, 

' Adapted from David Ricardo, Principles of Political Economy and Taxation 
(181 7), chap. V. 



644 MATERIALS FOR ELEMENTARY ECONOMICS 

but on the quantity of food, necessaries, and conveniences become 
essential to him from habit, which that money will purchase. The 
natural price of labor, therefore, depends on the price of the food, 
necessaries, and conveniences required for the support of the laborer 
and his family. With a rise in the price of food and necessaries, the 
natural price of labor will rise; with the fall in their price, the natural 
price of labor will fall. 

The market price of labor is the price which is really paid for it, 
from the natural operation of the proportion of the supply to the 
demand; labor is dear when it is scarce, and cheap when it is plenti- 
ful. However much the market price of labor may deviate from 
its natural price, it has, like commodities, a tendency to conform to it. 

It is when the market price of labor exceeds its natural price, 
that the condition of the laborer is flourishing and happy, that he 
has it in his power to command a greater proportion of the necessaries 
and enjoyments of life, and therefore to rear a healthy and numerous 
family. When, however, by the encouragement which high wages 
give to the increase of population, the number of laborers is increased, 
wages again fall to their natural price, and indeed from a reaction 
sometimes fall below it. 

When the market price of labor is below its natural price, the 
condition of the laborers is most wretched: then poverty deprives 
them of those comforts which custom renders absolute necessaries. 
It is only after their privations have reduced their number, or the 
demand for labor has increased, that the market price of labor will 
rise to its natural price, and that the laborer will have the moderate 
comforts which the natural rate of wages will afford. 

Notwithstanding the tendency of wages to conform to their 
natural rate, their market rate may, in an improving society, for an 
indefinite period, be constantly above it; for no sooner may the 
impulse, which an increased capital gives to a new demand for labor, 
be obeyed, than another increase of capital may produce the same 
effect; and thus, if the increase of capital be gradual and constant, 
the demand for labor may give a continued stimulus to an increase 
of people. 



WAGES 645 

(b) THE WAGES FUND 
I' 

The rate of wages depends on the proportion between population 
and employment, in other words, capital. 

We come now to the question as to what determines the share of 
the laborer, or the proportion in which the commodity, or commodity's 
worth, is divided between him and the capitaHst 

It is very evident, that the share of the two parties is the subject 
of a bargain between them; and if there is a bargain, it is not difficult 
to see on what the terms of the bargain must depend. All bargains, 
when left in freedom, are determined by competition, and the terms 
alter according to the state of supply and demand. 

Let us begin by supposing that there is any number of capitalists 
with a certain quantity of food, raw material, and instruments, or 
machinery; that there is also a certain number of laborers; and that 
the proportion, in which the commodities produced is divided between 
them, has fixed itself at some particular point. 

Let us next suppose that the laborers have increased in number 
one half, without any increase in the quantity of capital. There is 
the same quantity of the requisites for the employment of labor; 
that is, of food, tools, and material, as there was before; but for every 
100 laborers there are now 150. There will be 50 men, therefore, in 
danger of being left out of employment. To prevent their being left 
out of employment they have but one resource ; they must endeavor 
to supplant those who have forestalled the employment; that is, they 
must offer to work for a smaller reward. Wages, therefore, decline. 

If we suppose, on the other hand, that the quantity of capital has 
increased, while the number of laborers remains the same, the effect 
will be reversed. The capitalists have a greater quantity than before 
of the means of employment; of capital, in short, from which they 
wish to derive advantage. To derive this advantage they must 
have more laborers than before. These laborers are all employed 
with other masters: to obtain them they also have but one resource — 
to offer higher wages. But the masters by whom the laborers are 
now employed are in the same predicament, and will of course offer 
higher to induce them to remain. This competition is unavoidable, 
and the necessary effect of it is a rise of wages. 

It thus appears, that if population increases, without an increase 

' From James Mill, Elements of Political Economy (1821), pp. 25-28. 



646 MATERIALS FOR ELEMENTARY ECONOMICS 

of capital, wages fall; and that if capital increases, without an in- 
crease of population, wages rise. It is evident, also, that if both 
increase, but one faster than the other, the effect will be the same as 
if the one had not increased at all, and the other had made an increase 
equal to the difference. Suppose, for example, that population has 
increased one-eighth, and capital one-eighth; this is the same thing 
as if they had stood still, with regard to the effect upon labor. But 
suppose that, in addition to the above-mentioned one-eighth, popula- 
tion has increased another eighth, the effect, in that case, upon wages 
would be the same as if capital had not increased at all, and population 
had increased one-eighth. 

Universally, then, we may affirm, other things remaining the 
same, that if the ratio which capital and population bear to one another 
remains the same, wages will remain the same; if the ratio which 
capital bears to population increases, wages will rise; if the ratio 
which population bears to capital increases, wages will fall. 

II' 

Wages, then, depend mainly upon the demand and supply of 
labor; or, as it is often expressed, on the proportion between popula- 
tion and capital. By population is here meant the number only of 
the laboring class, or rather of those who work for hire; and by 
capital, only circulating capital, and not even the whole of that, but 
the part which is expended in the direct purchase of labor. To this, 
however, must be added all funds which, without forming a part of 
capital, are paid in exchange for labor, such as the wages of soldiers, 
domestic servants, and all other unproductive laborers. There is 
unfortunately no mode of expressing by one familiar term the aggre- 
gate of what may be called the wages-fund of a country: and as the 
wages of productive labor form nearly the whole of that fund, it is 
usual to overlook the smaller and less important part, and to say that 
wages depend on population and capital. It will be convenient to 
employ this expression, remembering, however, to consider it as 
elliptical, and not as a literal statement of the entire truth. 

With these limitations of the terms, wages not only depend upon 
the relative amount of capital and population, but cannot, under the 
rule of competition, be affected by anything else. Wages (meaning, 
of course, the general rate) cannot rise, but by an increase of the 

'Adapted from John Stuart Mill, Principles of Political Economy (1848), 
Book I, chap. xi. 



WAGES 



647 



aggregate funds employed in hiring laborers, or a diminution in the 
number of the competitors for hire; nor fall, except either by a 
diminution of the funds devoted to paying labor, or by an increase in 
the number of laborers to be paid. 



WAGES AND HOURS OF LABOR, 1890-1907' 



Calendar 

Year 



iSgo 
1891 
1892 
1893 
1894 
189s 
1896 
1897 
1898 
1899 
1900 
1901 
1902 
1903 
1904 
190S 
1906 
1907 













Retail 








Full-Time 


Prices of 
Food, 

Weighted 
According 
to Family 




Hours 


Wages 


Weekly 


Employees 


Per 
Week 


Per 
Hour 


Earnings 
Per Em- 








ployee 


Consump- 
tion 


Per Cent 


Per Cent 


Per Cent 


Per Cent 


Per Cent 


94.8 


100.7 


100.3 


101 .0 


102.4 


97-3 


TOO 


5 


100.3 


100.8 


103.8 


99-2 


100 


5 


100.8 


101.3 


lOI .9 


99.4 


100 


3 


100.9 


101.2 


104.4 


94- 1 


99 


8 


97 9 


97-7 


99-7 


96.4 


100 


I 


98.3 


98.4 


97.8 


98.6 


99 


8 


99.7 


99 5 


95.5 


100.9 


99 


6 


99-6 


99 2 


96.3 


106.4 


99 


7 


100. 2 


99 9 


98.7 


112. 1 


99 


2 


102.0 


101. 2 


99 5 


II5-6 


98 


7 


105 . 5 


104. 1 


lOI . I 


119. 1 


98 


I 


108.0 


105 9 


105.2 


123.6 


97 


3 


112.2 


109. 2 


110.9 


126.5 


96 


6 


116. 3 


112. 3 


110.3 


125-7 


95 


9 


117. 


112 . 2 


hi. 7 


133 -6 


95 


9 


118. 9 


114.0 


112.4 


142.9 


95 


4 


124. 2 


118. s 


115-7 


144.4 


95 





128.8 


122.4 


120.6 



Purchasing Power 
Measured by Re- 
tail Prices of 
Food, of — 



Hourly 

Wages 



Per Cent 



97. 
96. 



96 



100.5 
104.4 
103.4 
101.5 
102. s 
104.4 
102.7 
101 .2 
105-4 
104.7 
105.8 
107.3 
106.8 



Full-Time 
Weekly 
Earnings 
per Em- 
ployee 



Per Cent 
98.6 
97.1 
99-4 
96.9 



100. o 
104.2 
103.0 
101.2 
101.7 
103.0 
100.7 
98. 5 
101.8 
100.4 
loi .4 
102.4 
101.5 



189. WOMEN'S WORK AND WAGES^ 

It seems evident that modern improvements in machinery under 
normal circumstances favor the employment of women rather than of 
men. There is some reason to suppose that machinery also favors 
the employment of children as compared with adults, where the 
economic forces are allowed free play. 

So far as children are concerned, the economic tendency to adjust 
machine-tending to their limited strength is in some measure defeated 

' From Statistical Abstract of the United States, 1912, p. 296. Relative numbers 
are computed on the basis of the average for 1890-1899, taken as 100. 

[For a suggestion of the significance of the decrease in hours per week shown 
by this table see Selection 209, "Long Hours versus Efficiency." — Editors.] 

^ Adapted from J. A. Hobson, The Evolution of Modem Capitalism, chap, xi; 
(original edition). Walter Scott Publishing Co. 

[This passage, written nearlj' twenty years ago, is in some respects out-of-date. 
— Editors.] 



648 MATERIALS FOR ELEMENTARY ECONOMICS 

by the growth of strong public feeling and legislative protection of 
younger children. Had full and continued license been allowed to 
the purely "economic" tendencies of the factory system in England 
and in America, there can be little doubt but that almost the whole 
of the textile industry and many other large departments of manu- 
facture would be administered by the cheap labor of women and young 
children. The profits attending this free exploitation of cheap labor 
would have been so great that invention would have been con- 
centrated, even more than has been the case, upon spreading out the 
muscular exertion and narrowing the technical skill so as to suit the 
character of the cheaper labor. The increasing employment of women 
in machine-industry is in nearly all cases directly traceable to the 
"cheapness" of woman's labor as compared with man's. Thus we 
are brought to the discussion of the important question which underlies 
all understanding of the position of woman in modern industry — 
"Why are women paid less wages than men ?" 

In almost all kinds of work in which both men and women are 
engaged, the women earn less than the men. Where men and 
women are engaged in the same industries but in different branches, 
the wage level of the woman's work is nearly always lower than that 
of the men. A general survey of industry shows that the highly paid 
industries are almost invariably monopolized by men, the lowly paid 
industries by women. This applies not only to unskilled and skilled 
manual work, but to routine-mental, intellectual, and artistic work,^ 
wherever custom or competition are the chief direct determinants of 
wages. Certain exceptions to this rule, which readily suggest them- 
selves, are explained by the fact that the wages of the labor in question 
are determined not by custom or competition, but by some other law. 
Where the product is of the highest intellectual or artistic quality, sex 
makes no difference in the price; "the rent of ability" of George 
Eliot or Madame Patti is determined by the law of monopoly values. 
In certain employments, as, for instance, the stage, sexual attractions 
give women a positive advantage, which in certain grades of the 
profession assist them to secure a high level of remuneration. So also 
in a few cases governments or private employers pay women as highly 
as men for the same work, though women could be got to work for 
less. But even in those occupations where women would seem to be 

'This fourfold classification — (i) manual, (2) routine-mental, (3) artistic, (4) 
intellectual — is a serviceable suggestion of Mr. Sidney Webb in his paper upon 
woman's wages (Economic Journal, I, 1881). 



WAGES 649 

'most nearly upon an economic equality with men, in literature, art, 
or the stage, the scale of pay for all work, save that where special skill, 
personal attraction, or reputation secures a "fancy" price, is lower 
for women than for men. 

It is easy to find answers to the question, "Why are women paid 
less than men ?" which evidently contain an element of truth. Three 
answers leap readily to the lips: "Because women cannot work so 
hard or so well," "Because women can live upon less than men," 
"Because it is more difficult for a woman to get wage-work." Each 
of these answers comprises not one reason but a group of reasons why 
women get low wages, and the difficulty lies in relating the different 
reasons in these different groups so as to yield something that shall 
approach an accurate solution of the problem. Setting these groups 
in somewhat more exact language, we may classify the causes as — 

a) Causes relating to "productivity" or efficiency of labor. 

b) Causes relating to "needs" or standard of comfort. 

c) Causes relating to character and intensity of competition. 
Women do not on the average work so hard or so well as men, so 

that if wages were paid with sole reference to quantity and quality of 
the product of labor women would get less. This inferiority in the 
net efficiency of women's labor is partly due to physical, partly to 
social, causes. The following are the leading factors in this inferiority 
of efficiency : 

(i) The physical weakness of woman, as compared with man, 
closes many occupations to her. In manufactures the metal industries 
have been almost entirely closed to women, and most branches of the 
mining and railway industries. In England and America the rougher 
work of agriculture is almost wholly given over to male labor, and in 
several continental countries there is a growing tendency to spare 
women the kinds of labor which tax the muscular forces most severely. 
The growing consideration for the duties of maternity, operating 
through public opinion and legislation, favor this curtailment of 
woman's sphere of activity. Further, in all employments where 
physical strength is an important factor, the net productivity of 
woman's labor tends to fall below man's, although in some cases 
superior deftness or lightness of hand related to physical fragility may 
compensate. Even in modern textile factories the superior force of 
man's muscles often gives him a great advantage. In fustian and 
velvet cutting, where the same piece-wages are paid to men and 
women, the actual takings of the men are about double. "Every 



650 MATERIALS FOR ELEMENTARYECONOMICS 

person has two long frames upon which the cloth is stretched ready 
for cutting, and while women are unable to cut more than one piece 
at a time, men can cut two pieces without difficulty."^ 

Where physical strength is not a prime factor it may enter inci- 
dentally. So even in weaving women are under some disadvantage 
through inabiUty to work the heavy Jacquard looms, and to "tune" 
their looms. ^ 

Where manual work is concerned brute strength and endurance 
form an important ingredient in what is called manual skill, and affect 
the quality of the work as well as the pace and regularity of the 
output. Though, as we have seen, a chief object of modern machinery 
is to diminish the importance of this element, it plays no inconsiderable 
part in affecting the quantity of work turned out by women as com- 
pared with men in industries where the direct strain upon the muscles 
is less severe. 

(2) But even when we take those kinds of work where skill seems 
least dependent upon physical force, men have generally some 
advantage in productivity, though a smaller one. Where the elements 
of design, resource, judgment enter in, the superiority of male labor 
is unquestioned, and in occupations which demand these qualities 
women are confined generally to the lower routine portions of the 
work. How far these defects of manual and intellectual skill, which 
generally prevent women from successfully competing in the higher 
grades of labor, are natural, how far the results of defective education 
and industrial training, we are not called upon here to consider. The 
fact stands that women do not work so well. 

(3) The reluctance of male workers to allow women to qualify 
for and to undertake certain kinds of work which men choose to 
regard as " their own," though sometimes defensible when all the terms 
of competition are taken into account,^ must be held to confine and 
lessen the average productivity of female labor in certain depart- 
ments of industry. Closely allied to this is the social feeling, partly 
based upon the recognition of a real difference of physical and mental 

' Report to Commission of Labour on Employment of Women, p. 141. 

^ Webb, Economic Journal, I, p. 658. 

3 Women sometimes abuse the superior competitive powers contained in their 
lower standard of subsistence, and the smaller number of those dependent on them, 
to undersell male labor. In Sheffield file-making, where women are paid the same 
list of prices as men, it is said that they practice sweating in their homes to the 
detriment of male workers. So in carpet-weaving at Halifax; recently when the 



WAGES 651 

vigor, partly upon prejudice, which bars women from the highly paid 
and responsible posts of superintendence and control in industries 
where both sexes are employed. In a general comparison of the male 
and female wage in a highly organized industry, the fact that women 
are held disqualified for all posts of high emolument and responsibility 
has a material effect upon the average of wages. Where men and 
women work in the same industry, the women are commonly confined 
to the less productive work, and where they do the same work they 
seldom reach man's level in quantity and quality. 

(4) This inferior efficiency is not solely attributable to these 
reasons. Woman's incentive to acquire industrial efficiency is not so 
great as man's. A large number of women-workers do not enter an 
industrial occupation as the chief means of support throughout their 
life. The influence of matrimony and domestic life operates in 
various ways upon women's industry. The expectation of marriage 
and a release from industrial work must lessen the interest of women 
in their work. The fact that even while unmarried a large proportion 
of women-workers are not dependent upon their earnings for a liveli- 
hood will have the same result. A larger proportion of the woman's 
industrial career is occupied in acquiring the experience which makes 
her a valuable worker, and the probability that, after she has acquired 
it, she may not need to use it diminishes both directly and indirectly 
the net value of her industrial life; the element of uncertainty and 
instability prevents the advancement of competent women to posts 
where fixity of tenure is an important factor. 

Where married women are engaged in industrial work either in 
factories or at home, domestic work of necessity engages some of their 
strength and interest, and is liable to trench upon the energy which 
otherwise might go into industry. Even unmarried women have 
frequently some domestic work to do which is added to their industrial 
work. Thus the incentive to efficiency is weaker in woman, her 
industrial position is less stable and her industrial life shorter, while 
part of her energy is diverted to other than industrial channels. 

(5) There is conclusive evidence to show that women are more 
often absent from work owing to sickness and otht claims upon their 

men struck against a reduction upon their wage of 355., wom j took the work at 
205. (Lady Dilke, "Industrial Position of Women," Nineteenth Century, October, 
1893). In watch-making, "the handwork for which men were paid about i?>s. 
a week is now done by women with machinery for about 12s.'" (Report to Labour 
Commission on Women's Employments, p. 146). 



652 MATERIALS FOR ELEMENTARY ECONOMICS 

time than men.^ Though closely related to the former factors this 
may be treated separately in assessing the net productiveness of 
women, because it is distinctly measurable. But in touching this 
point it should be remarked that weaker muscular development does 
not necessarily imply more sickness. The loss of working time 
sustained by women could probably be reduced considerably by more 
attention to physical training and exercise and by a higher standard 
of diet. 

(6) Although the limitations of law and custom, which limit the 
hours of labor for women in many of their industrial occupations and 
forbid them to undertake night work, cannot be reasonably held to 
reduce the net efficiency of women's labor taken as an aggregate, they 
must be allowed to diminish the direct net productiveness of women 
in certain employments as compared with men, and either to bar 
them out of these employments or engage them upon lower wages. 

(7) Lastly, the inferior mobility of woman as compared with man 
has an influence in reducing the average efficiency of her labor. On 
the one hand, women are more liable to have the locality of their home 
fixed by the requirements of the male worker in the family; on the 
other hand, they are physically less competent to undertake work far 
from their home. Hence they are far more narrowly restricted in 
their choice of work than men. They must often choose not that 
work they like best, or can do best, or which is most remunerative, 
but that which lies near at hand. This restriction implies that large 
numbers of women undertake low-skilled, low-paid, ineffective, and 
irregular work at their homes or in some neighboring work-room, 
instead of engaging in the more productive and more remunerative 
work of the large factories. Every limitation in freedom of choice of 
work signifies a reduction in the average effectiveness of labor. 

These elements of inferior physique and manual skill, lower 
intelligence and mental capacity, lack of education and knowledge of 
life, irregularity of work, more restricted freedom of choice, must in 
different degrees contribute to the inferior productivity of woman's 
industrial labor. 

In regarding this influence the experienced student of industrial 
questions hardly requires to be reminded that these must be regarded 

^ Dr. Bertillon {Journal de la societe de siatistique de Paris, October-November, 
1892) shows that among the Lyons silkworkers (1872-89) and in the Italian 
Societies (1881-85) the sickness of women is considerably greater than of men. 
In Lyons 9.39 days as compared with 7.81 for men; in Italy 8.5 as compared 
with 6 . 6. 



WAGES 653 

not merely as causes of low wages, but also as effects. This constant 
recognition of the interaction of the phenomena we are regarding as 
cause and effect is essential to a scientific conception of industrial 
society. Women are paid low wages because they are relatively 
inefficient workers, but they also are inefficient workers because they 
are paid low wages. 

While this smaller productivity diminishes the maximum wage 
attainable by women as compared with men, it is evident that many 
forces are at work which tend to equalize the productivity of men and 
women in industry: the evolution of machinery adapted to the weaker 
physique of women; the breakdown of customs excluding women 
from many occupations; the growth of restrictions upon male adult 
labor with regard to the working-day, etc., correspondent with those 
placed upon women; improved mobility of women's labor by cheaper 
and more facile transport in large cities ; the recognition by a growing 
number of women that matrimony is not the only livelihood open to 
them, but that an industrial life is preferable and possible. These 
forces, unless counteracted by stronger moral and social forces, seem 
likely to raise the average productivity of women's industrial labor, 
and to incite her more and more to undertake industrial wage-work. 

As the maximum wage may be said to vary with productivity, so 
the minimum wage is said to vary with the "wants" of the worker. 
Women are said to "want" less than man, and therefore the stress of 
competition can drive their wages to a lower level. It is possible that 
a woman can sustain the smaller quantity of physical energy required 
for her work somewhat more cheaply than a man can sustain the 
energy required for his work, and that the early increments of material 
comfort above the bare subsistence line may be attended by a larger 
increase of productivity in the man than in the woman. If this is so, 
then the minimum subsistence wage and the wage of true economic 
efficiency, the smallest wage a wise employer in his own interest will 
consent to pay, are lower in the case of women than of men. But 
this difference furnishes no adequate explanation of the difference 
between the male and the female minimum wage. The wage of the 
low-skilled male laborer enables him to consume certain things which 
do not belong strictly to his "subsistence" — to wit, beer and tobacco; 
the wage of the low-skilled female laborer often falls below what is 
sufficient with the most rigid economy to provide "subsistence." 
We are not then concerned with a difference which refers primarily 
to the quantity of food, etc., required to support Hfe. The wages 



6S4 MATERIALS FOR ELEMENTARY ECONOMICS 

of the low-skilled laborer in regular employ would, if properly used, 
suffice to furnish him more than a bare physical subsistence; the 
wages of the lowest-paid women workers in factories would not 
suihce to maintain them in the physical condition to perform their 
work. 

It is not then precisely with the "standard of comfort" of male 
and female workers that we are concerned. The economic relation 
in which men and women workers stand to other members of their 
family is a more important factor. The wage of a male worker must 
be sufficient to support not only himself but the average family 
dependent upon him, in the standard of comfoit below which he 
will not consent to work. When little work is available for his wife 
and children, or where his "standard of comfort" requires them not 
to undertake wage-work, his minimum wage must sufiice to keep 
some four persons. His standard of comfort may be beaten down by 
stress of circumstances, his family may be driven to take what 
work they can get, but in any case his wage must be above the 
"subsistence" of a single man. When the man is the sole wage- 
earner, or is only assisted slightly by his family, as, for example, in 
the metal and mining and building industries, average male wages are 
much higher than in the textile industries, where the women and 
children share largely in the work. 

Women workers, on the other hand, have not in most cases a 
family to support out of their wages. In the majority of instances 
their own "sustenance" does not or need not fall entirely upon the 
wages they earn. They are partly supported by the earnings of a 
father or a husband or other relative, upon some small unearned 
income, upon public or private charity. Where married women 
undertake work in order to increase the family income, or where girls 
not obliged to work for a living enter factories or take home work to do, 
there is no ascertainable limit to the minimum wage in an industry. 
Grown-up women living at home will often work for a few shillings a 
week to spend in dress and amusements, utterly regardless of the fact 
that they may be setting the wage below starvation-point for those 
unfortunate competitors who are wholly dependent on their earnings 
for a living. Even where girls living at home pay to their parents the 
full cost of their keep, the economy of family life may enable them to 
keep down wages to such a point that another girl who has to keep 
herself alone may be sorely pressed, while a woman with a family to 
support cannot get a living. 



WAGES 655 

Miss Collet, in her investigation of women workers in East 
London, remarked of the shirt-finishers, one of the lowest paid employ- 
ments: "These shirt-finishers nearly all receive allowances from 
relatives, friends, and charitable societies, and many of them receive 
outdoor relief."' This is true of most of the low-paid work of women. 
Even in the textile factories, with the exception of weaving, most of 
the scales of wages are below what would suffice to keep the recipient 
in the standard of comfort provided by the family wage. 

A knowledge of the productivity of labor as measuring the 
maximum wage-level, and of "wants" or standard of comfort as 
measuring the minimum wage-level, does not enable us to determine 
even approximately the actual wage-level in any industry. The actual 
wage may be fixed at any point between the two extremes. So far as 
competition is an active determinant, everything will depend upon 
the quantitative relation between supply and demand for labor. 
When there is a short supply of labor available for any work, wages 
may rise to the maximum ; when there is more labor available than is 
required, wages will fall toward the minimum. But, as we have 
already admitted, competition works very slowly and inadequately 
in many of the industries in which women and children are engaged. 
The force of custom, assisted by ignorance of the labor market, 
prevents w^omen from taking advantage of an increased demand or a 
decreased supply of labor to lift this wage above the customary level 
toward the level of productivity. Women are more contented to 
live as they have lived than men. 

Those who have investigated the conditions of women workers in 
towns are agreed as to the enormous influence of class and aesthetic 
feelings in narrowing the competition. This sensitiveness of social 
distinction in industrial work, based partly upon consideration of the 
class and character of those employed, partly upon the skill and 
interest of the work itself, is a widespread and powerful influence 
among women workers. It tends to bring about that equalization of 
wages in skilled and unskilled industries which, as we have seen, 
practically exists, for if there is an economic lise of wages in the lower 
grades of work, it does not tempt the competition of high-skilled 
workers, while a corresponding rise in the wages of the higher grades 
would draw competitors from the lower grades to qualify themselves 
for undertaking work which would at once give them more money and 
more social respect. The lower wages often paid for more highly 

■ Labour and Life of I he People, T, 410. 



656 MATERIALS FOR ELEMENTARY ECONOMICS 

skilled work simply mean that the women take out a larger portion 
of their wage in "gentility." 

The above-mentioned forces operate chiefly as barriers of free 
economic competition. But women are equally at a disadvantage 
when and in so far as they do compete for work and wages. Weak, 
unorganized units of labor, they are compelled to make terms with 
large organized masses of capital. By the organized action of trade 
unionism the majority of skilled working men have been able to raise 
their wages far above the bare subsistence minimum, and to hold it 
at the higher level until a firm standard of higher comfort is formed to 
be a platform for further endeavor. With a few significant exceptions, 
skilled women workers have been unable to do the same. Instead of 
presenting a firm, united front to their employers in their demand for 
higher wages, or their resistance of a fall, they are taken singly and 
compelled to submit to any terms which the employers choose to 
impose, or custom appears to sanction. The consequence is that in 
most instances skilled women workers are paid very little higher 
wages than unskilled women workers. The high value due to their 
skill goes either to the employer in high profits, or, where keen com- 
petition operates, to the consumer in low prices; the woman who puts 
out skill is paid not according to her worth but according to her wants. 
Yet the possession of technical skill is the basis of trade organization. 
Wherever a number of women workers possess a particular skill and 
experience, and are engaged in fairly stable employment, the requisites 
of effective trade organization exist. If they could but combine, these 
women could wield an economic power, measured by the difl&culty 
and cost of dismissing them en masse and replacing them by less skilled 
and experienced labor, which they can use as a lever to raise their 
wages and other conditions of employment by a series of steps until 
they approach the maximum limit imposed by their productivity. 

This brings us to the most vital point in the problem of the 
industrial position of women. When there is an oversupply of labor 
qualified to compete for any work, wages must fall to the minimum of 
"wants" unless those in possession of the work are so strongly organ- 
ized as to prevent outsiders from effectively competing. In a highly 
skilled trade the workers may often have a practical monopoly of the 
skill, which gives them both power to organize and power when 
organized. But in a low-skilled trade, or where employers are able to 
introduce unlimited numbers of girls into the trade, there exists no 
such power to organize. Those who most need organization are least 



WAGES 657 

able to organize. This is the crux for low-skilled male labor, and the 
great mass of women's industries are in the same economic condition, 
because the kind of skill required is possessed or easily attainable by a 
much larger number of competitors for work than are sufBcient to 
meet the demand at a decent wage. The deep abiding difficulty in 
the way of organizing women workers lies here. Cut out as they 
are, by physical weakness, by lack of the means of technical training, 
in some cases by organized opposition of male workers, or by social 
prejudices, from competing in a large number of skilled industries, 
their competition within the permitted range of occupations is keener 
than among men: not merely in the unskilled but in the skilled 
industries the available supply of labor is commonly far in excess of 
the demand, for the skill is generally such as is common to or easily 
attainable by a large number of the sex. To this must be added the 
consideration that a larger proportion of women's industries are con- 
cerned with the production of luxuries which are peculiarly subject to 
fluctuation of trade by the elements of season, weather, fashion, and 
rise or fall of incomes. Finally, a much larger proportion of women's 
work is done in small factories, in workshops, and in the home, under 
conditions which are inimical to the effective organization of the 
workers. Until out-work is much diminished, and effective inspection 
and limitation of hours in small workshops drives a much larger 
proportion of women workers into large factories, where closer social 
intercourse can lay the moral foundation of trade organization in 
mutual acquaintance, trust, and regard, there is little prospect of 
women being able to raise their " customary " wage considerably above 
its present subsistence level, or to obtain any considerable alleviation 
of the burdensome conditions of excessive hours of labor, insanitary 
surroundings, unjust fines, etc., from which many women workers 
suffer. 

Women cannot in most of their industries organize effectively 
under present conditions. In each trade, therefore, the workers 
employed are surrounded by a permanent mass of potential "black 
legs" willing to take their labor from urgent need, ignorance, or 
thoughtlessness, and possessing or able to attain the small skill 
required. In men's industries, save in the most unskilled, there is not 
a constant oversupply of labor. In most women's industries there is. 

Comparing women's wages with men's we are now able to sum up 
as follows: The smaller productivity of woman's work makes the 
possible maximum wage lower; the smaller wants of women make the 



658 MATERIALS FOR ELEMENTARY ECONOMICS 

possible minimum wage lower; the greater weakness of women as 
competitors, arising chiefly from excess of supply of labor, makes 
their actual wage approximate to the lower rather than to the 
higher level. 

In regarding productivity as a measure of maximum wage it is 
necessary to guard carefully against one misapprehension. So far as 
we are comparing the wage of men and women engaged upon the same 
work, the smaller wages of the latter may easily be seen to have some 
relation to the smaller product of their labor. But when productivity 
is expressed in terms of the selling value of the work, no such measure- 
ment is open to us. We are thus thrown back on market value and 
are told that the reason women get so little is that what they make 
fetches so low a price. But the circularity of this argument will 
appear on revising the question and asking, "Why do women's 
products sell so cheap ?" the obvious answer being, "Because the cost 
of labor in them is so little" — i.e., because women receive low wages. 
But if we refuse to take selling prices as the measure of productivity, 
what measure have we? No accurate measure of effort, skill, or 
efl&ciency is open if we refuse the scale of the market itself. Yet if we 
consider the conditions of wages and prices in such "sweated" trades 
as shirt-making, we cannot but conclude that the consumer gets the 
advantage of the "sweating"; that is to say, a certain portion of the 
productivity of the workers passes to the consumer through the agency 
of low prices. That which might have gone to the shirt-makers in 
decent wages has gone to the purchaser. 

If the above analysis is correct it is not difference of sex which is 
the chief factor in determining the industrial position of woman. 
Machinery knows neither sex nor age, but chooses the labor embodied 
in man, woman, or child, which is cheapest in relation to the degree of 
its efficiency. Thus the causes which depress woman's industry are 
chiefly the same which depress the industry of low-skilled men and 
children. In each case the limits of productivity and "wants" are 
lower than for skilled men workers, while the terms of their com- 
petition keep their wages to the lower level and check the full incentive 
to efficiency. Setting aside the case of children, who are protected 
in some degree from the full effects of competition upon the conditions 
of their employment, the industrial case of women is closely analogous 
to that of low-skilled men. The physical weakness of the one cor- 
responds with the technical weakness of the other so far as efficiency 
is concerned; in both cases the low standard of wants gives a low 



WAGES 659 

minimum wage, while the excessive supply of labor, rendering con- 
certed action almost impossible, keeps wages close to the minimum. 
The growing tendency of modern industry to engage women and 
children away from their homes is fraught with certain indirect 
important consequences. When industry was chiefly confined to 
domestic handicrafts, the claims of home life constantly pressed in and 
tempered the industrial life. The growth of factory work among 
women has brought with it inevitably a weakening of home interests 
and a neglect of home duties. The home has suffered what the factory 
has gained. Even the shortening of the factory day, accompanied as 
it has been by an intensification of labor during the shorter hours, does 
not leave the women competent and free for the proper ordering of 
home life. Home work is consciously slighted as secondary in 
importance and inferior, because it brings no wages, and if not 
neglected is performed in a perfunctory manner, which robs it of its 
grace and value. This narrowing of the home into a place of hurried 
meals and sleep is on the whole the worst injury modern industry has 
inflicted on our lives, and it is difficult to see how it can be compen- 
sated by any increase of material products. Factory life for women, 
save in extremely rare cases, saps the physical and moral health of the 
family. The exigencies of factory life are inconsistent with the posi- 
tion of a good mother, a good wife, or the maker of a home. Save in 
extreme circumstances, no increase of the family wage can balance 
these losses, whose values stand upon a higher qualitative level. 

190. TIME WAGES AND PIECE WAGES^ 

The method of payment of wages is often a matter of equal impor- 
tance with that of the amount paid. The nominal wages may be far 
from the actual value received by the workingman, if the methods by 
which they are paid are such as to lend themselves to oppressive con- 
ditions. 

The simplest form of payment, and that generally applicable, 
is payment by the time employed, usually by the week or day. See- 
ing that workers differ much more widely in the quantity and quality 
of work accomplished in a given time, than they do in wages received, 
and that the same worker at different times performs different quan- 
tities of work, it, of course, follows that there are wide varieties in the 
rates of pay per unit of effort. The fact, also, that competition 

' From the Final Report [XIX] of the Industrial Commission (1902), pp. 735-36. 
[For a specimen schedule of piece-wage rates see Selection 198. — Editors.] 



66o MATERIALS FOR ELEMENTARY ECONOMICS 

compels the employer to reduce his costs in all possible ways, drives 
him to secure, if possible, as time goes on, more work for the same 
money, or the same work for less money. But, in the case of pay- 
ment by the time employed, there is always uncertainty regarding 
the amount of work which the employee will produce. Time work, 
in order to be reduced to the lowest basis of cost, requires constant 
supervision. The average man, whether workman or professional 
man, is eager to earn as much as possible with as much economy of 
strength as possible. Hence the progress of American industry has 
been characterized quite largely by the substitution of piece payments 
for time payments. Wherever it has been possible, through a minute 
division of labor, to standardize the product, the piece system is 
applicable. It does not apply to artistic and diversified work, where 
quality is desired but, operating upon the individual ambition of 
each workman, with a goal set before him each day, the piece system 
is unquestionably adapted to draw out his entire energies. It is 
quite generally maintained by employers that workingmen paid by 
the piece produce from lo to 25 or 30 per cent more of a given product 
in a given time than when paid by the time. However, from the 
standpoint of the employer, the tendency of men paid by the piece 
to scamp the work is often found to be a disadvantage. On this 
account many large employers, having tried the piece system for a 
time, have abandoned it and returned to time payments. This they 
found to be necessary in order to maintain a high standard in the 
quality of their output. The piece system, for the time being, 
enabled them to measure up the possible energies of their employees, 
and when once they had in this way touched bottom and established 
a standard, they were able thenceforth to apply this standard to 
the time system. 

From the standpoint of the workingman the piece system is 
usually considered the greatest disadvantage. It unquestionably 
often leads to overexertion, which exhausts the body and mind, and 
shortens the trade life of the worker. Various witnesses before the 
Industrial Commission have emphasized this feature. Especially, 
however, is the piece system considered an injury because it is likely 
to result in repeated reductions of the price per piece. The employer 
judges his entire staff by the speed of the most rapid, and conse- 
quently, by showing up the earnings of his best men, is able to present 
a strong argument for reduction along the entire line. It is unques- 
tionably true that there are in all occupations wide ranges of ability 



WAGES 66 1 

among men employed on the same work, and those who acquire 
exceptional speed are few. Their names and records are well-known 
throughout the trade or locality. When this minority is taken as a 
standard and the wages of all reduced proportionally, the piece 
system undoubtedly becomes not merely a means of greater economy, 
but also a means of oppression and exploitation. 

Again, the piece system is often the means of keeping idle an 
oversupply of employees. A larger number than is necessary to 
do the work is kept on the rolls. There are, however, various classes 
of workers, like the shoe workers and weavers, who occasionally 
demand the piece system in place of the time system. These are 
occupations where, by speeding up the machinery, a greater output 
can be obtained, and if the price paid is not based on the piece, the 
worker does not share in the advantage of the increased speed. 

It must be noted, however, that the time system also under 
certain conditions may become a system of driving and overexertion. 
This is true in those unorganized trades, like the clothing trade, or 
trades where women and children are employed, in which individual 
bargains are made. Since in such trades there is no minimum scale 
of wages, the high standard of output of the more rapid worker is 
applied to those who are slower, and the time wages are reduced 
accordingly. The time system must necessarily, in the long run, 
under economical management, become practically a piece system. 
This is true even though it does not necessarily become a task system, 
where the worker is required, as often happens in the clothing trade, 
to turn out a given quantity of goods for the standard wages in a given 
time. 

191. WAGE SYSTEMS AND LABOR MANAGEMENT' 

We come to the special systems designed to correct or to reduce 
greatly the evils of the straight day wage and the straight piece rate. 
The principal of these are the Halsey premium plan, the Taylor 
differential piece rate, the Gantt bonus system, and the Emerson 
efficiency or individual-effort system. They are placed in this order 
for reasons that will appear as we go on. And the Halsey premium 
plan is placed first because it is simply and only a wage system, while 
the others are rather parts of philosophies and methods of handling 
labor in which the wage system is only one element. 

' Adapted from C. B. Going, Principles of Industrial Engineering, pp. 125-42. 
The McGraw-Hill Book Co., 191 1. 



662 IMATERIALS FOR ELEj\fENTARY ECONOMICS 

The Halsey premium plan bears the strong impress of intimate 
familiarity with the shop — of complete knowledge of the traditions 
of the shop, the suspicions of the shop men, and the weaknesses of 
shop managers; and it seems to be marked further by a convic- 
tion of the strength of these long-established institutions and by a 
tenderness toward disturbing or offending them. It is, in short, a 
characteristically well-informed effort to get good results, to bring 
about better conditions, without making any trouble. 

The essence of the Halsey premium system is to pay men the 
established day wage under any circumstances, and then to reward 
them further by a voluntary extra payment if they do better than 
the established record of past performances. When the system is 
introduced there is no necessary or conspicuous change from the way 
things have always been done. Every man gets his regular day wages 
on pay day exactly as before. But by reference to past records 
standard times are set for the various operations upon which the 
workmen are engaged. In setting these standard times some allow- 
ance may be made for the probable shortening of the old records under 
the incentive the premium system is going to offer; but in the main 
the controlling consideration is, how long did the job take on the 
average when it w^as done by good workmen in the past ? These 
standard times are tabulated, recorded in the office for reference, and 
the times taken by the men day by day in doing these same jobs, or 
performing the same operations, are compared with these standards. 
When any man shortens the standard time on any job after the plan 
has been put in force, he is credited with a premium, which is equal 
to his wages at his regular hourly rate for a portion of the time 4ie 
saved on the job. This portion is usually either 30 or 50 per cent of 
the time saved. The idea of granting only part of the saved time to 
the workman is twofold. First, he uses the shop facilities harder — 
uses more power, wears out more tools, etc., and so the shop should 
have part of the gain ; second, as the employer thus profits as well as 
the man, he is less likely to be tempted to cut rates when the time is a 
good deal shortened. 

Halsey puts no upper limit on a workman's earnings. However 
much the man's skill and ingenuity may shorten the times he gets his 
regular proportion of the gain. One objection sometimes raised to 
the plan is that as the times are not scientifically set (that is, as the 
operations are not scientifically studied and figured down to the short- 
est practicable time), they may sometimes prove to be very much 



WAGES 663 

in error against the shop, and the discovery that they are and that the 
men in consequence are making very high premiums may tempt the 
employer to cut them down, something in the same way as piece rates 
are so often cut down. 

James Rowan, a member of a prominent firm of engine builders 
in Glasgow, has put forth a modification of the premium plan, gener- 
ally known as the Rowan premium, which has as one of its principal 
objects the protection of the shop against such mistakes as are re- 
ferred to in the preceding paragraph. The fundamental principle 
of the Rowan premium plan is that under no circumstances can the 
workman make more than double his regular day wages. Under the 
Rowan system the time saved is converted into a percentage of the 
standard time. The workman then receives, as a premium, this same 
percentage of the time he actually took. Another way of defining 
the Rowan premium takes the form of the equation : 

Time saved r, • 

-^=r- X lime taken = Premmm. 

lime set 

The system is regarded with a good deal of favor in England, but 
it is not much used in the United States. It pays the workman more 
largely than the Halsey plan for the earlier (and easier) savings, but 
as the base upon which the premium is calculated shrinks constantly 
as time is saved, the man's profit from large savings of time decreases 
proportionately. The actual premium is the same at 90 per cent time 
saved as at 10 per cent. There are some other special modifications 
of the premium plan in use, but it is not important to include them 
here. 

Proceeding now from the wage systems which are merely modes of 
payment — that is, which do not go beyond the concept of enlisting 
the workman's interest through the medium of his compensation — 
we come to another group of methods in which the manner of pay- 
ment is only one feature of a policy of management, embodying many 
other ideas and principles. 

Prominent among these as one of the early and very widely noticed 
applications of the ideas upon which other systems of very different 
philosophy have been built, is the Taylor differential piece rate. 

Taylor begins by an ultimate analysis of the job into its elements. 
Each of these elements is then subjected to thorough expert study to 
determine the methods and appliances by which a man working 
steadily at a pace he can maintain without injury can reach maximum 
performance and minimum time. The workman is then provided 



664 MATERIALS FOR ELEMENTARY ECONOMICS 

with everything necessary to accompHsh, in the standard time, the 
results determined by this study, and he is thoroughly instructed in 
every step of the operation by minutely detailed written schedules and 
by expert advisers. 

Finally, he is paid at piece rates which are set at two different 
levels — a low price per piece if the workman fails to do the job in the 
standard time, and a high price per piece if he does it in the standard 
time. This is the so-called differential rate. The successful worker is 
paid not only for the more pieces he turns out, but he is also paid more 
for each piece. The unsuccessful worker not only makes less pieces 
to be paid for, but he is paid less for each piece of the smaller number 
he makes. The money gain to the man who attains standard per- 
formance thus becomes very large. 

The bonus plan worked out by H. L. Gantt, an associate of Mr. 
Taylor, has rather more elasticity and has found highly successful 
application. Like Taylor, Gantt begins with standardization of con- 
ditions and accurate time study. That is, he makes it possible for the 
man to work fast, and decides as nearly as possible just how fast the 
man should work. The initial engagement of the workman, however, 
is on a day-pay basis. The workman is sure of regular day wages as 
a minimum. Under the Taylor piece rate, or any piece rate, the 
minimum as well as the maximum depends on the number of pieces 
made. If a man is unlucky and does not finish even one piece he 
gets nothing. Under the Gantt system he gets day wages however 
little he may produce. The computations for extra or bonus payment 
thereafter are on the basis of time. To use Mr. Gantt's own words: 

" Under this system each man has his work assigned to him in the 
form of a task to be done, by a prescribed method, with definite 
appliances, and to be completed within a certain time. The task is 
based on a detailed investigation by a trained expert of the best 
method of doing the work; and the task-setter, or his assistant, acts 
as an instructor to teach the workmen to do the work in the manner 
and time specified. If the work is done within the time allowed by 
the expert, and is up to the standard for quality, the workman 
receives extra compensation (usually 20 to 50 per cent of the time 
allowed) in addition to his day's pay. If it is not done in the time set, 
or is not up to the standard for quality, the workman receives his 
day's pay only. 

"The system is thus in effect a combination of the day-rate and 
piece-work systems. While learning to do his task the workman is 



WAGES 665 

on a day rate; when he has learned to do it the compensation for 
the task is a fixed quantity, really equivalent to piece-rate. The 
method of payment, then, is day rate for the unskilled and piece 
work for the skilled." 

Because Halsey and Gantt both grant day wages as a minimum 
and add something more if a man exceeds standard performance, 
there is an unfortunately general but ill-informed impression that the 
systems are much alike. "Psychologically — that is, in their interpre- 
tation of an appeal to human emotions — they are almost diametrically 
unlike. They seek similar results (an increase of production) and 
they ofifer a similar reward (pay for time saved) but by contradictory 
policies. Halsey is so desirous not to "stir up things" that he 
scarcely lets the men know that times are being studied. Gantt 
is so desirous to make large output possible that he would make 
most radical and far-reaching changes if necessary to remove causes of 
inefficiency. Halsey relies entirely on the workman's ability to find 
ways of shortening the standard time. Gantt analyzes each job 
scientifically, resolves it into its elements, determines the best way 
and the minimum time for performing each, and will not even let a 
workman try to earn bonus until the man has been thoroughly 
instructed by an expert. Halsey abhors the idea of setting any " task " 
as the limit a man must reach. Gantt glories in the "task" as a 
stimulus to effort, and makes such a task the goal a man must reach 
before bonus begins. Halsey tempts the man on by at least a small 
premium for even a trifling gain in the time used. Gantt gives no 
bonus until a very large gain necessary to reach his task limit has been 
made, and then he gives a great big bonus — 25 per cent or 50 per cent 
all at once. 

Halsey avoids class distinctions by making the passage from day- 
wage earnings only to premium earnings a progress of insensible 
gradations. Gantt emphasizes class distinction not only by the sharp 
and wide break between day wages and bonus earning, but also by 
encouraging outward signs and symbols of bonus earning — encoura- 
ging the group of bonus workers and the creation of a bonus society, 
entry into which is a desirable goal for those who are still in the 
no-bonus class. 

These things are really more important in dealing with men than 
questions of 20 per cent, or 30 per cent, or 50 per cent premium; 
and in these things the philosophies of Gantt and Halsey take widely 
different and opposing views. 



666 MATERIALS FOR ELEMENTARY ECONOMICS 

The Emerson efficiency or individual-effort system has certain 
resemblances to both the Halsey premium, and the Gantt bonus plans. 
It recognizes that there is truth in the psychology of both these sys- 
tems, different as they are psychologically, and it recognizes advan- 
tages in both their methods. Nevertheless, although it has these 
resemblances it proceeds by a philosophy and a plan of its own, which 
is distinct and characteristic. 

To begin with, it establishes the regular daily-wage scale and 
system as the basis of employment, thus agreeing with both Halsey 
and Gantt. Next, it prescribes the standard of production after 
scientific study, and offers a rather large bonus for reaching it, thus 
agreeing with Gantt; but it leads up to this bonus reward by a 
graduated scale of smaller bonuses, thus approaching the Halsey 
premium plan. 

To take up its features in greater detail, let us go back to the 
measures preliminary to the introduction of the system. As in the 
case of the Taylor and Gantt policies already described, the arrange- 
ment, equipment, and working conditions in the shop or factory are 
standardized to secure the utmost efficiency and to prevent all wastes 
and losses that are preventable. Standard times for every operation 
are then determined and scheduled by the most careful study. In 
setting these times Emerson apparently gives more weight to averaged 
past experience than Taylor or Gantt, but is not so closely governed 
by it as Halsey. Taylor and Gantt, indeed, are inclined to proceed 
without much regard to what has been the practice in any particular 
case. They go back to the very best way of doing the thing, and 
having determined this scientifically for every element, they add 
these elementary operation times together, allow a certain factor for 
what might be called the human equation — that is, a margin by which 
the workman may be permitted to fall short of perfection — add per- 
haps another factor for imperfection of materials, and so arrive at a 
final result. Halsey is disposed to make good existing shop practice 
the standard and not to go very far back of that in setting standard 
times, but to rely largely on the skill and effort of the individual work- 
man for finding ways of bettering the old records. Emerson's policy 
inclines rather to the method of taking such records as Halsey would 
accept as standards, and refining down by deducting for the pre- 
ventable wastes and losses that have been occurring and that are to 
be eliminated by the improvements installed. This method, as will 
be seen, goes upon the supposition that if you take practice as it is, and 



WAGES 667 

correct it for all the errors and inefficiencies you can discover and 
identify, the residue will be automatically self-corrected with such 
inherent, necessary, and unpreventable inefficiencies and wastes as 
are innate in conditions and undiscoverable by inspection. 

Under the efficiency system, if a workman finishes a job or an 
operation in the standard time which has been fixed, he receives a 
bonus of 20 per cent. This rate is about the same as the lower limit 
usually adopted by Gantt. The Emerson bonus for standard per- 
formance, however, is always 20 per cent, while Gantt varies somewhat 
with the agreeableness and disagreeableness of the work, occasionally 
running as high as 50 per cent and probably averaging from 30 to 40. 
Under the efficiency plan, however, if the workman reaches two-thirds 
of the standard performance (that is, if he finishes the job in one and 
a half times the standard time) he reaches a point beyond which he 
begins to receive a little extra reward, increasing gradually like the 
Halsey premium. This reward, however, instead of rising at a 
uniform rate as the Halsey premium does, rises on a sliding scale. It 
rises, in fact, as a function of a parabola, the performance being 
measured along the curve and the bonus being apportioned according 
to the ordinate. This makes the bonus very small indeed for the 
early savings of time below time and a half. It merges into the 20 
per cent bonus at standard performance. For still further reductions 
of time, that is, for doing the work in less than standard time set, the 
workman gets the 20 per cent bonus, plus all the time that he saves. 



XVI. LABOR PROBLEMS 

192. PURPOSES OF THE AMERICAN FEDERATION OF LABOR 

A Few of Its Declarations upon Which It Appeals to All 

Working People to Organize, Unite, Federate, and 

Cement the Bonds or Fraternity^ 

1. The abolition of all forms of involuntary servitude, except as 
a punishment for crime. 

2. Free schools, free textbooks, and compulsory education. 

3. Unrelenting protest against the issuance and abuse of injunction 
process in labor disputes. 

4. A workday of not more than eight hours in the twenty-four 
hour day. 

5. A strict recognition of not over eight hours per day on all 
federal, state, or municipal work and at not less than the prevaiHng 
per diem wage rate of the class of employment in the vicinity where the 
work is performed. 

6. Release from employment one day in seven. 

7. The abolition of the contract system on pubHc work. 

8. The municipal ownership of pubHc utilities. 

9. The aboHtion of the sweat-shop system. 

10. Sanitary inspection of factory, workshop, mine, and home. 

11. Liability of employers for injury to body or loss of life, 

12. The nationalization of telegraph and telephone. 

13. The passage of anti-child labor laws in states where they do not 
exist and rigid defense of them where they have been enacted into law. 

14. Woman suffrage coequal with man suffrage. 

15. Suitable and plentiful playgrounds for children in all cities. 

16. The initiative and referendum and the imperative mandate 
and right of recall. 

17. Continued agitation for the public bath system in all cities. 

18. Quahfications in permits to build, of all cities and towns, that 
there shall be bathrooms and bathroom attachments in all houses or 
compartments used for habitation. 

19. We favor a system of finance whereby money shall be issued 
exclusively by the government, with such regulations and restrictions 

'■ From official literature of the American Federation of Labor. 

668 



LABOR PROBLEMS 669 

as will protect it from manipulation by the banking interests for their 
own private gain 

The above is a partial statement of the demands which organized 
labor, in the interest of the workers — aye, of all the people of our 
country — makes upon modern society. 

Higher wages, shorter workday, better labor conditions, better 
homes, better and safer workshops, factories, mills, and mines. In 
a word, a better, higher, and nobler life. 

Conscious of the justice, wisdom, and nobility of our cause, the 
American Federation of Labor appeals to all men and women of labor 
to join with us in the great movement for its achievement. 

More than two million wage-earners who have reaped the advan- 
tages of organization and federation appeal to their brothers and 
sisters of toil to unite with them and participate in the glorious 
movement with its attendant benefits 

We have nearly 1,000 volunteer and special organizers as well as 
the ofiicers of the unions and of the American Federation of Labor 
itself always wilUng and anxious to aid their fellow- workmen to organ- 
ize and in every other way better their conditions. 

For information all are invited to write to the American Federation 
of Labor headquarters at Washington, D.C. 

Wage- workers of America, unite! 



193- STRUCTURE OF THE AMERICAN FEDERATION OF 

LABOR' 



Membership 
^American Federation 

of Labor 

September 30,1312 

1,84I,2G8 



I 



5 
Jhpartments 




41 

Stale Federations) 



20,364 

Local Unions 



' From the Report of the Proceedings of the Thirty-seco>uf Annual Convention 
of the American Federation of Labor (191 2), p. 82. 



LABOR PROBLEMS 



671 



194. AVERAGE MEMBERSHIP IN THE AMERICAN FEDER- 
ATION OF LABOR, AS REPORTED OR PAID UPON 
FOR EACH OF THE YEARS 1897-1912' 

1897 264,825 

1898 278,016 

1899 349,422 

1900 548,321 

1901 787,537 

1902 1,024,399 

1903 1,465,800 

1904 1,676,200 

1905 1 ,494,300 

1906 1,454,200 

1907 1,538,970 

1908 1,586,885 

1909 1,482,872 

1910 , 1,562,112 

1911 1,761,835 

1912 1,770,145 



195. UNION CHARTERS ISSUED BY THE AMERICAN 
FEDERATION OF LABOR, 1897-1912^ 



Year 



1897 

1898 

J899 

1900 

1901 

1902 (eleven months) 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

19T0 

1911 

1912 



Inter- 
national 



9 

9 

14 

7 

14 

20 



Depart- 
ment 



State 



Central 



35 

96 

123 

127 

171 

99 
67 
53 
72 
73 
40 

83 
61 

57 



Trade 
Unions 



154 
129 

303 

484 
575 
598 
743 
179 
143 
167 
204 
100 
77 
152 
207 
149 



Federal 
Unions 



35 
53 

lOI 

250 

207 

279 

396 

149 

73 

87 

93 

55 

52 

96 

55 

49 



Total 



203 
449 
849 
916 
1,024 
h333 
443 
287 

317 
373 
234 
176 

334 
326 
260 



' From the Report of the Proceedings of the Thirly-second Annual Convention of 
the American Federation of Labor (191 2), p. 80. 
'Ibid., p. 63. 



672 MATERIALS FOR ELEMENTARY ECONOMICS 

196. EXTRACTS FROM THE CONSTITUTION OF INTERNA- 
TIONAL UNION UNITED MINE WORKERS OF 
AMERICA, REVISION 1908 

Preamble 

We hereby declare to the world that our objects are — 

First — ^To secure an earning fully compatible with the dangers of 
our calling and the labor performed. 

Second — ^To establish as speedily as possible, and forever, our 
right to receive pay, for labor performed, in lawful money, and to 
rid ourselves of the iniquitous system of spending our money wherever 
our employers see fit to designate. 

Third — To secure the introduction of any and all well-defined 
and established appliances for the preservation of Hfe, health, and 
limbs of all mine employees. 

Fourth — To reduce to the lowest possible minimum the awful 
catastrophies which have been sweeping our fellow- craftsmen to 
untimely graves by the thousands; by securing legislation looking 
to the most perfect system of ventilation, drainage, etc. 

Fifth — To enforce existing laws; and where none exist, enact and 
enforce them; calling for a plentiful supply of suitable timber for 
supporting the roof, pillars, etc., and to have all working places ren- 
dered as free from water and impure air and poisonous gases as 
possible. 

Sixth — To uncompromisingly demand that eight hours shall con- 
stitute a day's work, and that not more than eight hours shall be 
worked in any one day by any mine worker. The very nature of our 
employment, shut out from the sunlight and pure air, working by 
the aid of artificial light (in no instance to exceed one candle power), 
would, in itself, strongly indicate that, of all men, a coal miner has the 
most righteous claim to an eight -hour day. 

Seventh — To provide for the education of our children by lawfully 
prohibiting their employment until they have attained a reasonably 
satisfactory education, and in every case until they have attained 
fourteen years of age. 

Eighth — To abrogate all laws which enable coal operators to cheat 
the miners, and to substitute laws which enable the miner, under the 
protection and majesty of the state, to have his coal properly weighed 
or measured, as the case may be. 

Ninth — To secure, by legislation, weekly payments in lawful money. 



LABOR PROBLEMS 673 

Tenth — To render it impossible, by legislative enactment in every 
state, for coal operators or corporations to employ Pinkerton detect- 
ives or guards, or other forces (except the ordinary forces of the 
state) to take armed possession of the mines in cases of strikes or 
lockouts. 

Eleventh — To use all honorable means to maintain peace between 
ourselves and employers; adjusting all differences, so far as possible, 
by arbitration and conciliation, that strikes may become unnecessary. 

Constitution 

article i 

Name, Objects, and Jurisdiction 

Section i. This organization shall be known as the United Mine 
Workers of America. 

Sec. 2. The objects of this Union are to unite mine employees 
that produce or handle coal or coke in or around the mines, and ameli- 
orate their condition by methods of conciliation, arbitration, or 
strikes. 

Sec. 3. This organization shall be composed of International, 
District, Sub-District, and Local Unions. 

Sec. 4. The International Union shall have jurisdiction over all 
Districts, Sub-Districts, and Local Unions, which shall be governed 
by this Constitution. 

article II 
Officers and Their Duties 

Section i. The officers of the Union shall be one President, one 
Vice-President, one Secretary-Treasurer, and an Executive Board 
to be composed of one member from each district under the jurisdic- 
tion of the United Mine Workers, each district to elect its members 
of the International Executive Board, the President, Vice-President, 
and Secretary-Treasurer to be members of the board by reason of 
their position. 

Sec. 2. The President shall preside at all general conventions of 
the Union and meetings of the International Executive Board; he 
shall sign all bills, and official documents, when satisfied of their 
correctness; he shall, with the consent of the Executive Board, fill, 
by appointment, all vacancies occurring in any International office, 
and in like manner may suspend or remove any International officer 



674 MATERIALS FOR ELEMENTARY ECONOMICS 

for insubordination, or just and sufl&cient cause; he shall, with the 
consent of the Executive Board, appoint a man, whose duty shall be 
to collect and compile statistics on the production, distribution, con- 
sumption, freight rates, market conditions, and any other matters of 
interest connected with the coal trade, and from time to time appoint 
such organizers and workers in the International office or in the field 
as may be required; he shall send out in circular form to all Locals 
six weeks previous to International Convention, such recommenda- 
tions as he may deem wise, to be acted on at International Conven- 
tion, so delegates to said convention may have the advice of their 
respective locals on such recommendations; he may attend in person 
or send an International officer to visit Local Unions, District and Sub- 
District conventions, and any other places connected with the United 
Mine Workers of America, when convinced that such services are 
required; he may appoint one or more officers or members, when 
deemed necessary, whose duty will be to examine the financial accounts 
of any Local Union, instruct the officers in the discharge of their 
duties, and report to the President the standing of each Local Union 
visited; he shall devote his time and attention to the affairs of the 
Union ; decide all questions of dispute concerning the meaning of the 
Constitution, and exercise general supervision over its workings, both 
in the field and in the International offices, as his judgment dictates 
or the exigencies of the case reqmre; he shall, quarterly, name the 
pass-word for the use of the Local Unions; he shall appoint each year, 
on the first day the annual convention meets, a committee of three 
whose duties shall be to receive and pass upon, as to where all reso- 
lutions and amendments to the Constitution presented by the dele- 
gates belong, and distribute them to the proper committees direct 
that have been appointed to act upon them. 

Sec. 3. The Vice-President shall act as general organizer, and 
shall be under the direction of the President, and shall succeed that 
officer in case of death, resignation, or removal from office. 

[Sec. 4 states the duties of the Secretary-Treasurer, which are the usual duties 
pertaining to such an office.] 

Sec. 5. The Executive Board shall constitute an International 
Board of Conciliation and Arbitration; shall execute the orders of 
the International Convention, and between conventions shall have 
full power to direct the workings of the organization, also to levy and 
collect assessments when necessary. It shall hold in trust for the 
United Mine Workers of America all money deposited in the name of- 



LABOR PROBLEMS 675 

the Executive Board by the Secretary-Treasurer, but under no circum- 
stances shall said money be drawn upon except upon the written order 
of two-thirds of the members of the International Executive Board. 

Sec. 6. The International Executive Board shall have power to 
order a general strike or suspension by a two-thirds vote at any time 
during the year that they deem necessary, and each member shall 
have one vote, and one additional vote for every two thousand mem- 
bers in good standing they represent, or a majority fraction thereof; 
provided, that all District Presidents, Vice-Presidents, and Secretaries 
be called into joint conference for consideration before any general 
strike or suspension order be issued. 

Sec. 8. The term of all elective officers shall be from April i to 
March 31 of each year. 

ARTICLE III 

Qualifications and Salary of Officers 

Section i. Any member in good standing in the organization 
shall be eligible to hold office in the International Union, provided 
he is not a salaried officer of a Sub-District or District at the same 
time, and provided he has never been found guilty of misappropriating 
any funds of the organization intrusted to his care, and has been a 
member of a Local Union for one year prior to his election. 

Sec. 2. The President's salary shall be $3,000 per annum, and all 
legitimate expenses; Vice-President, $2,500 per annum, and all 
legitimate expenses; Secretary-Treasurer, $2,500 per annum, and all 
legitimate expenses; and the Editor of the official organ, viz.. The 
United Mine Workers' Journal, $1,500 per annum; Executive Board 
members, $4 . 00 per day, and all legitimate expenses, when employed 
by the President to work in the interest of the United Mine Workers 
of America. 

Sec. 3. The compensation of Tellers, Auditing and Credential 
Committee shall be $4 . 00 per day, and legitimate expenses for all time 
actually employed in the performance of their duty. 

article IV 

Revenues 

Section i. Every Local Union shall pay direct to the Interna- 
tional Secretary-Treasurer a per capita tax of 25 cents per month per 
member, and such additional assessments as may be levied by an 



676 MATERIALS FOR ELEMENTARY ECONOMICS 

International Convention, or a referendum vote of the members of 
the United Mine Workers, or by the International Executive Board, 
for two months pending a referendum vote, payments to be based 
upon the amount of dues collected in each month by the Local Union. 
Boys under 16 years of age shall be known as half-members and shall 
pay one-half as much tax and assessment as full members. 

Sec. 2. The Local Secretary shall fill out and forward to the Inter- 
national and District Secretary-Treasurer, on or before the 25th of 
each month, a report of all members in good standing in the Local 
Union on the first day of that month, together with all taxes and 
assessments due to the International and District offices from the same. 

Sec. 6. No Local Union shall be exonerated from the payment 
of per capita tax or assessments, unless their members have been idle 
for one month or more. 

Sec. 8. In all cases where Local Unions desire to be exonerated 
from the payment of tax and assessments, a request must be signed 
by the President, Secretary, and Mine Committee. In such cases 
the President, Secretary, and Committee must attach their individual 
signatures; but no Local Union shall be exonerated from such pay- 
ment until their request has been approved by the District and Inter- 
national Secretary, and the request must be made each month in 
place of the regular monthly financial report as long as the members 
remain idle. 

Sec. 9. The local monthly dues to be paid by each member shall 
not be less than 50 cents per month, together with such assessments 
as may be levied by the different branches of the U.M.W. of A. 

Sec. id. The initiation fee shall be $10.00 for practical miners 
and for non-practical men it shall be left to the .discretion of the 
district where applications for membership are made. Sons of mem- 
bers between fourteen and sixteen years of age shall pay an initiation 
fee of $2 . 50. 

Sec. II. The funds of the organization shall be used for the pur- 
pose of assisting those who are in need from idleness or distress, when 
the payment of the same has been approved by the International 
Executive Board. 

ARTICLE v 

Conventions and Representation 

Section i. The International Convention shall be held annually 
on the third Tuesday in January, at such place as may be determined 
upon by the preceding convention. Special conventions shall be 



LABOR PROBLEMS 677 

called by the President, when so instructed by the Executive Board, 
or at the request of five Districts. 

Sec. 2. Representatives to the International Convention shall be 
elected directly from Local Unions and shall have one vote for one 
hundred members or less, and an additional vote for each one hundred 
members or majority fraction thereof, but no representative shall 
have, or be credited by the Credential Committee with, more than 
five votes, nor shall said Credential Committee transfer votes to any 
delegate not duly authorized by the Local Union. 

Sec. 3. No Local Union shall be entitled to representation in the 
International Convention that is in arrears for dues or assessments 
for two months preceding the one in which the International Con- 
vention is held and which has not in every particular complied with 
the Constitution of the District in which said Local Union may be 
located, or which has less than ten members 

[Sees. 4, 5, 6 cover further details concerning representation of locals in the 
convention.] 

Sec. 7. Any member of the United Mine Workers of America 
accepting a position other than that of a miner or mine worker shall 
not be eligible to act as representative to any Sub-District, District, 
or International Convention, or represent the United Mine Workers 
in a central body or State Federation of Labor Convention 

Sec. 9. Delegates to the International Convention shall be paid 
railroad fare to and from the convention on [a stated] basis 

Sec. II. Local Unions, having been organized one year prior to the 
annual convention and having 100 members or more in good standing, 
shall send a representative to the annual convention of the United 
Mine Workers of America, or pay to the International Secretary- 
Treasurer a fine of $25 .00 for each 100 members in good standing in 
the Local Union, unless exonerated by the International Executive 
Board. This section is not to apply to Local Unions whose members 
are on strike or whose members are idle for one month or more prior 
to the convention, on account of a suspension or closing down of the 
mines, nor does this section prevent Local Unions of less than 100 
members holding meetings jointly and jointly sending a delegate to 
represent such Locals in the International Convention. 

article VI 
Nominations and Elections 
Section i. The President, Vice-President, Secretary-Treasurer, 
Auditors, Tellers, and Delegates to the American Federation of 



678 MATERIALS FOR ELEMENTARY ECONOMICS 

Labor shall be elected by a majority of the popular vote of the mem- 
bers in good standing in the International, District, and Local organiza- 
tions. 

[The procedure of elections is covered in detail in sections 2-9. It involves 
nomination and election by the locals, which use official blanks supplied by the 
International Secretary-Treasurer. Election is on the basis of a majority of the 
total vote cast.] 

ARTICLE VII 

Cards 

Section i. Local Unions shall provide each member with a Due 
Card, upon which the dues and assessments paid by the member 
shall be entered, which shall be his receipt for the same. 

Sec. 2. Due Cards shall not admit any person to membership 
from one Local to another, and to protect the membership of indi- 
viduals who are unable to pay their dues because of no Local existing 
where they reside, the International, District, and Sub-District 
Secretaries shall, upon the payment of dues and assessments by said 
member, issue the usual cards for the same; provided that this shall 
not apply to a member living in a locality where a Local Union is in 
existence. 

Sec. 3. No person a member of the organization, who holds a Due 
or Transfer Card showing him to be a niember in good standing, shall 
be debarred or hindered from obtaining work on account of race, 
color, creed, or nationality, and any person who shall be found guilty 
of discriminating against a fellow member on account of his race, 
color, creed , or nationality shall be fined not less than $5 . 00 nor more 
than $25.00, and any Local that may be found guilty of such dis- 
crimination for the same reasons, shall be fined not less than $10 . 00 
nor more than $50 . 00. 

Sec. 4. Any member desiring to leave the mine where his Local 
in located and work elsewhere shall immediately make application 
to the Secretary of the Local for a Transfer Card 

Sec. 6. No card shall be issued to any member when the Local 
is three or more months in arrears to the International, District, or 
Sub-District for dues or assessments. Of&cers of any Local Union 
issuing cards in violation of any Section of Art. VII shall be fined 
$10 . 00 for each card issued, the fine to be collected in the same man- 
ner as dues and assessments. 

Sec. II. The International Secretary-Treasurer shall prepare and 
send out monthly a statement of all Locals three months or more 
in arrears for dues and assessments, and no Local Union shall refuse 



LABOR PROBLEMS 679 

to accept a Transfer Card from any Local unless it appears on said 
list as being in bad standing. Local Unions on strike shall be exempt 
from the provisions of this section. 

Sec. 15. Any member going to work in a non-union or unfair mine 
shall forfeit his membership and all rights and privileges guaranteed 
by such membership, unless such work was done under a dispensation 
granted by the president of the District where he has secured employ- 
ment. 

Sec. 16. Any member holding a Transfer Card shall not be entitled 
to strike benefits (where such are paid) from the Local Union issuing 
the card, until said card has been redeposited in the Local Union 
issuing it and then only from the date the card was deposited. The 
acceptance of such card shall be contingent on the rules governing the 
acceptances of cards in the Districts where such card is deposited. 

ARTICLE VIII 

Supplies 

Section i. The price of a charter and supplies shall be $15, and 
shall consist of one charter, one press seal, one ledger, one recorder, 
one book of orders on the Treasury, one Treasurer's receipt book, 
fifty Constitutions, fifty Due Cards, one book of Transfer Cards, 
four manuals, one gavel, one copy of the proceedings of the last annual 
convention, and such documents as the International Secretary- 
Treasurer may, from time to time, desire to send out. 

Sec. 2. Due Cards, Transfer Cards, and other supplies shall be 
furnished by the International Union to the Local Unions at such 
rates as the International Executive Board may determine. 

ARTICLE IX 

Organizers 

Section i. Commissions as Organizer shall be signed by the 
President and attested by the Secretary-Treasurer. 

Sec. 2. Organizers not under salary from the International Union 
may retain $7 from the charter fees of new Locals organized by them, 
to pay them for their time, and shall send the other $8 to the Inter- 
national oflSce with their report. 

ARTICLE X 

Strikes 
Section i. When trouble of a local character arises between 
members of a Local Union and their employers, the officers of said 
Local shall endeavor to effect an amicable adjustment, and failing 



68o MATERIALS FOR ELEMENTARY ECONOMICS 

in this they shall immediately notify the officers of the District to 
which the affected Locals are attached, and said District officers shall 
immediately investigate the cause of complaint; and failing to effect 
a peaceable settlement on a basis that would be fair and just to 
aggrieved members, finding that a strike would best serve the interests 
of the locality affected, they may order the inauguration of a strike, 
but no local strike shall be legalized or supported by a District unless 
its inauguration was approved by the officers of the District or by 
the International Executive Board, upon an appeal taken by the 
aggrieved members from the decision of the District officers; any 
Local Union striking in violation of the above provisions shall not be 
sustained or recognized by the International officers. 

Sec. 2. Before final action is taken by any District upon questions 
that directly or indirectly affect the interests of the mine workers 
of another District, or that require a strike to determine, the President 
and Secretary of the aggrieved District shall jointly prepare, sign, and 
forward to the International President a written statement setting 
forth the grievance complained of, the action contemplated by the 
District, together with the reasons therefor, and the International 
President shall, within five days after the receipt of such statement, 
either approve or disapprove of the action contemplated by the 
aggrieved District, and such approval or disapproval together with 
the reasons therefor, shall be made in writing, and a copy forwarded 
to the Secretary of the complaining District. Should the action con- 
templated by the aggrieved District receive the approval of the 
International President, the District shall be free to act, but should the 
International President disapprove the action contemplated, the Dis- 
trict may appeal to the International Executive Board, which shall be 
convened to consider such appeal within five days after its receipt by 
the International Secretary. Until the International President has 
approved or the International Executive Board has sustained the 
appeal, no District shall be free to enter upon a strike unless it shall 
have been ordered by an International Convention. 

Sec. 3. When any member of the United Mine Workers is sus- 
pended or discharged, it shall be the duty of the Mine Committee 
to immediately investigate the case, and if the member discharged 
is not guilty of an offense justifying the same, the grievance shall 
immediately be reported to the Sub-District President in writing, 
under the seal of the Local, and if, upon investigation, the report 
of the Local Committee is found correct, the Sub-District and District 



LABOR PROBLEMS 68i 

Presidents shall immediately insist upon the reinstatement of the 
suspended or discharged member. 

Sec. 4. The International officers shall, at any time they deem it 
to the best interests of mine workers in a District that is idle, for just 
and sufficient reasons, order a suspension in any other District or 
Districts that would in any way impede the settlement of the District 
affected; provided, that such action would conserve to the best 
interests of the United Mine Workers of America. 

ARTICLE XI 

Miscellaneous 

Sec. 6. No Local Union shall divide the funds of the Union at any 
time among its members, and should any Local Union disband or 
cease to work for any cause, all moneys, supplies, and other properties 
belonging to the Local Union shall be turned over to the International 
organization. The above provision shall not be construed to prevent 
the use of the funds for legitimate purposes. 

Any Local, Sub-District, or District Union using the funds in- 
trusted to its care for other than legitimate purposes shall be fined 
double the amount so used. Such fines shall be paid into the Inter- 
national Treasury, the Sub-Districts to collect fines from the Locals, 
the Districts from the Sub-Districts, and the International from the 
Districts. 

Any Local, Sub-District, or District officer misappropriating funds 
intrusted to his care shall not be eligible to again hold office. 

Sec. 7. Any National, District, or Sub-District officer accepting 
a salaried political office, other than that of a state legislator, member 
of Congress, member of Local School Boards, city, borough, or town 
council or local poor boards, shall resign his office with the United 
Mine Workers immediately upon his acceptance of the same. 

Sec. 8. This Constitution may be amended by a majority of all 
votes cast at the annual convention. 

Sec. 9. All Local Unions shall set aside one meeting each month 
at which the agreement and constitution governing same shall be 
read and discussed. 

ARTICLE XII 

Districts 
Section i. Districts shall be formed with such number and terri- 
tory as may be assigned them by the International officers, and shall 



682 MATERIALS FOR ELEMENTARY ECONOMICS 

be subjected to the jurisdiction, laws, rules, and usages of the Interna- 
tional Union, 

Sec. 2. Districts may adopt such laws for their government as 
they may deem necessary, provided they do not conflict with the 
International Union. 

ARTICLE XIII 

Sub-Districts 

Section i. Sub-Districts may be formed with such number and 
territory as may be assigned them by the Districts to which they are 
attached, and shall be subject to the jurisdiction, laws, rules, and usages 
of the International and District Unions. 

Sec. 2. Sub-Districts may adopt such laws for their government 
as they may deem necessary, provided they do not conflict with Inter- 
national and District Constitutions or agreements entered into. 

ARTICLE xiv 
Locals 

Section i. Local Unions shall be composed of miners, mine 
laborers, and other workmen, skilled and unskilled, working in and 
about the mines, except mine manager, top boss, and persons engaged 
in the sale of intoxicating liquors, and shall be given such numbers as 
the International Secretary-Treasurer may assign them. 

Sec. 2. All Locals shall be under the jurisdiction of the Inter- 
national, District, and Sub-District Unions, and may make such laws 
for their government as they deem necessary, provided they do not 
conflict with the International, District, and Sub-District Constitu- 
tions or agreements entered into. Any Local Union or members 
thereof violating this section shall be subject to a fine of not less than 
$S-oo. 

Sec. 3. All Local Treasurers and such Secretaries as handle the 
finances of the organization shall furnish sufiicient security for the 
faithful performance of their duties, the amount of said security to 
be determined by the Local Union. 

Sec. 4. All local ofl&cers and committees shall be elected the last 
meeting of June of each year, by a majority vote of the members 
present, and shall serve one year, or until their successors are elected 
and qualified. 

Sec. 5. All Checkweighmen employed by members of the United 
Mine Workers shall be members of the United Mine Workers six 



LABOR PROBLEMS 683 

months prior to their election, except newly organized locals, and 
voted for and elected by those who pay to maintain them. Notice 
of election for Checkweighman shall be posted in some conspicuous 
place at the mines where Checkweighman is to be employed at least 
three days before the time set for such election. It shall be the duty 
of such Checkweighman to keep a record of all men employed in and 
around the mine. Under no consideration shall a Checkweighman 
be considered an officer of the Local Union. The term for which a 
Checkweighman shall serve shall be left to the discretion of those who 
employ him. The above will not prevent any local officer from acting 
as Checkweighman. 

ARTICLE XV 

Section i. The United Mine Workers^ Journal, official organ of 
the organization, shall be issued on Thursday of each week from head- 
quarters. It shall be a medium for circulating the news of interest 
to the craft; shall pubhsh from time to time the important transac- 
tions of the organization, general mining and trade news, together 
with copies of official circulars and financial reports, and other matters 
of general interest. It shall be neutral in politics, non-sectarian in 
religion, dignified in tone, and a consistent advocate of the principles 
of modern trades organizations. 

Sec. 3. The business management of the Journal shall be under 
the supervision of the International Secretary 

Sec. 4. All Local Unions shall subscribe for one copy of the 
Journal, paying for it in advance, and Secretaries are hereby instructed 
to examine every issue and read all official circulars to the members 
that are published therein. 

197. JOINT INTERSTATE AGREEMENT OF OPERATORS 
AND MINERS' 

It is hereby agreed between the representatives of the South- 
western Interstate Coal Operators' Association and the representatives 
of Districts 14, 21, and 25 of the United Mine Workers of America, 
that the existing interstate, district, and Texas agreements be con- 
tinued without any change or addition whatever, except as follows: 

Day wage, yardage, dead and deficient work to be reduced 
throughout 5.55 per cent, except the day- wage scale in Texas mines, 
which shall be reduced one-half the above amount. 

' Text of the official agreement. 



684 MATERIALS FOR ELEMENTARY ECONOMICS 

Interstate and district scales to be signed simultaneously at Pitts- 
burg and to expire March 31, 1906, 

INSIDE DAY-WAGE SCALE 

Track layers $2 . 42 

Track layers' helpers 2 . 23 

Trappers i . 07 

Bottom cagers 2.42 

Drivers 2 . 42 

Trip riders 2.42 

Pushers 2.42 

Water haulers and machine haulers 2.42 

Timbermen, where such are employed 2 . 42 

Pipemen for compressed air plants 2.36 

All other inside day labor 2 . 23 

Spragging, coupling, and greasing, when done by 

boys 1 . 65 

Shaft sinkers 2 . 64 

Shot firers under normal conditions 2 . 83 

OUTSIDE DAY-WAGE SCALE 

First blacksmiths $2 . 83 

Second blacksmiths 2 . 60 

Blacksmiths' helpers 2 . 23 

Carpenters 2 . 30 

(Provided that in no case will there be any reduction from the rate 
of wages now paid to carpenters of more than 5.55 per cent.) 

All other outside day labor not enumerated. ... $1 .91 

Provided that any class of outside day labor now receiving $2 . 02^ 
or more per day shall be reduced 5.55 per cent. This provision only 
applies to outside day labor not otherwise enumerated. 

SCALE FOR ENGINEERS 

Engineers, first class, 500 tons and over, per 

month $74 . 62 

Second class, 300 to 500 tons, per month 68 . 95 

Third class, 300 tons or less, per month 61 .40 

Tail rope and slope engineers shall be reduced 5.55 per cent 
below present wages. 

The minimum rate for tail rope and slope engineers shall be $2 . 25 
per day, or $58. 56 per month; provided, further, that the maximum 
rate for tail rope and slope engineers shall be $2 . 55 per day, or $66 . 12 
per month. Twenty-six days to constitute a month's work and nine 



LABOR PROBLEMS 685 

hours to constitute a day's work. All overtime in excess of nine 
hours to be paid for at a proportionate rate per hour. 

The tonnage shall be determined by the average for the month of 
November, 1902, and based upon mine- run coal; but in no case shall 
any reduction from the present wages be made. 

This scale of wages applies only to mines in operation at least one 
year, and in all new mines the wages of the engineers shall be advanced 
with the increased tonnage until the maximum rate is reached ; pro- 
vided, that in no case shall engineers employed at new mines receive 
less than $2 . 25 per day; also that in no case shall engineers, firemen, 
or pumpers be interfered with or asked to cease work by any local 
committee or local union official during the life of this contract. 

The mining prices inside and outside day-wage scale (except engi- 
neers) provided for in this contract is based upon an eight-hour 
workday. 

RULES AND REGULATIONS 

Eight-Hour Day 

All classes of day labor are to work full eight hours, and the going 
to and coming from the respective working places is to be done on the 
day hand's own time. All company men shall perform whatever day 
labor the foreman may direct. An eight-hour day means eight 
hours' work in the mines at the usual working places, exclusive of 
noon time — which shall be one-half hour — for all classes of inside day 
labor. This shall be exclusive of the time required in reaching such 
working places in the morning and departing from the same at 
night. 

Drivers shall take their mules to and from the stables, and the 
time required in so doing shall not include any part of the day's 
labor; their time beginning when they reach the change at which 
they receive empty cars — that is, the parting drivers at the shaft 
bottom and the inside drivers at the parting — and ending at the same 
places; but in no case shall a driver's time be docked while he is 
waiting for such cars at the points named. The inside drivers, at 
their option, may either walk to and from their parting, or take 
with them, without compensation, either loaded or empty cars to 
enable them to ride. This provision, however, shall not prevent 
the inside drivers from bringing to and taking from the bottom 
regular trips, if so directed by the operator, provided such work is 
done within the eight hours. 



686 MATERIALS FOR ELEMENTARY ECONOMICS 

When the stables are located outside the mine the companies agree 
to deliver the mules at the bottom of the shaft in the morning and 
relieve the drivers of the mules at the bottom of the shaft at night. 

When the men go into the mine in the morning they shall be 
entitled to two hours' pay whether or not the mine works full two 
hours; but after the first two hours the men shall be paid for every 
hour thereafter, by the hour, for each hour's work or fractional part 
thereof. If for any reason the regular work cannot be furnished the 
inside day laborers for a portion of the first two hours, the operators 
shall furnish other than the regular labor for the unexpired time. 

Penalties for Loading Impurities 

In order to insure the production of clean, marketable coal, it is 
herein provided that if any miner shall load with his coal sulphur, 
bone, slate, blackjack, or other impurities, he shall, for the first offense, 
be notified by the mine foreman; for the second offense he may be 
suspended for one day; for the third and each subsequent offense 
occurring in any one month he may be suspended for three days ; pro- 
vided, that if in any case it is shown that a miner maliciously or 
knowingly loads impurities, he shall be subject to discharge. It is 
further agreed that if any miner has been suspended and claims that 
an injustice has been done him, the matter shall be taken up for in- 
vestigation and adjustment in the manner provided in section three 
of this agreement. 

Duties of Pit Committee 

a) The duties of the pit committee shall be confined to the 
adjustment of disputes between the pit boss and any member of the 
U.M.W. of A. working in and around the mines, arising out of this 
agreement or any district or sub-district agreement made in con- 
nection therewith, when the pit boss and said miner or mine 
laborer have failed to agree. 

b) In case of any local trouble arising in any mine through such 
failure to agree between the pit boss and any miner or mine laborer* 
the pit committee and the pit boss are empowered to adjust it, and in 
the case of their disagreement it shall be referred to the superintendent 
of the company and the district president of the U.M.W. of A., or 
such person as he may designate to represent him; and should they 
fail to agree it shall be referred to the commissioner of the South- 
western Interstate Coal Operators' Association and the district presi- 
dent of the U.M.W. of A. for adjustment; and in all cases the mines. 



LABOR PROBLEMS 687 

miners, mine laborers, and parties involved must continue at work, 
pending an investigation and adjustment, until a final decision is 
reached in the manner above set forth. 

c) If any day men refuse to continue at work because of a grievance 
which has or has not been taken up for adjustment in the manner pro- 
vided herein, and such action shall seem likely to impede the operation 
of the mine, the pit committee shall immediately furnish a man or 
men to take such vacant place or places at the scale rate, in order that 
the mine may continue at work ; and it shall be the duty of any mem- 
ber or members of the United Mine Workers who may be called upon 
by the pit boss or pit committee to immediately take the place or 
places assigned to him or them in pursuance hereof. 

d) The pit committee, in the discharge of its duties, shall under no 
circumstances go around the mine for any cause whatever, unless 
called upon by the pit boss or by a miner or a company man who may 
have a grievance that he cannot settle with the boss. Any pit com- 
mitteeman who shall attempt to execute any local rule or proceeding 
in conflict with any provision of this contract, or any other made in 
pursuance hereof, shall be forthwith deposed as committeeman. The 
foregoing shall not be construed to prohibit the pit committee from 
looking after the matter of membership dues and initiations in any 
proper manner. 

e) Members of the pit committee employed as day men shall not 
leave their places of duty during working hours except by permission 
of the operator, or in cases involving the stoppage of the mine. 

/) The right to hire and discharge, the management of the mine, 
and the direction of the working force are vested exclusively in the 
operator, and the U.M.W. of A. shall not abridge this right. It is not 
the intention of this provision to encourage the discharge of employees 
or the refusal of employment to applicants because of personal 
prejudice or activity in matters affecting the U.M.W. of A. If any 
employee shall be discharged or suspended by the company and it is 
claimed that an injustice has been done him, an investigation, to be 
conducted by the parties and in the manner set forth in paragraphs 
a and b of this section, shall be taken up promptly, and if it is 
proven that an injustice has been done, the operator shall reinstate 
said employee and pay him full compensation for the time he has been 
suspended and out of employment; provided, if no decision shall be 
rendered within five days the case shall be considered closed, in so far 
as compensation is concerned, unless said failure to arrive at a deci- 



688 MATERIALS FOR ELEMENTARY ECONOMICS 

sion within five days is owing to delay upon the part of the operator, 
in which case a maximum of ten days' compensation shall be paid. 

Local Demands 
There shall be no demands made locally by either operators or min- 
ers which are in conflict with this agreement or any district or sub- 
district agreement made prior to September i, 1904; and there shall 
be no provision imposed violating the same. Any local member, 
ofl&cial, or committee shutting down a mine without orders from the 
district president or district executive board shall be fined in the 
manner provided for in the national constitution of the U.M.W. of 
A., and such additional penalties may be imposed as are now or may 
be provided for in the constitutions of ^he various district organiza- 
tions. All such fines are to be collected by the companies and paid 
into the district treasury of the U.M.W. of A. Should any operator 
violate this agreement, or any provision hereof, such operator or com- 
pany shall be fined one hundred dollars ($100), said fine to be paid 
into the treasury of the Southwestern Interstate Coal Operators' 
Association. 

Payment of Wages 

The operators agree to pay twice a month, the dates of payment to 
be determined by the district joint convention; and these payments 
are to be made at the office nearest to the mine wherein or at which 
the employees are employed; provided, however, that this ofiice 
shall be located not more than two miles from such mine. 

Check-off 

The operators will recognize the pit committee in the discharge of 
their duties, as provided in this agreement, and agree to check ofif 
dues, assessments, fines, and initiations from all miners and mine 
laborers when desired. In order to protect the companies, the 
U.M.W. of A. agrees, when the companies so demand, to furnish a 
collective and continuous order authorizing the companies to make 
such deductions. The companies agree to furnish the miners' local 
representatives a monthly statement showing separately the amount 
of dues, assessments, fines, and initiations collected. In case any fine 
is imposed the propriety of which is questioned, the amount of such 
fine shall be withheld by the operator until the case has been taken 
up for adjustment and a decision reached. 

It is agreed that the miners may employ a checkweighman to see 
that coal is properly weighed and a correct record made thereof, 



LABOR PROBLEMS 689 

and when such checkweighman is employed the companies shall fur- 
nish him a check number, and he shall credit to his number such por- 
tion of each miner's coal as he may be authorized to do by the local 
union. It is understood that the above provision shall not affect the 
arrangements now existing at any mine where a check number is 
issued in the name of the local union, and dues, assessments, fines, and 
initiations collected by this method. 

Measurements 

It is agreed that measurements of entries, brushing, room turning, 
and deadwork shall be made semi-monthly, and payment in full 
shall be made for such work in the same manner as that in which other 
work is paid for. 

Equal Turn 

The operator shall see that an equal turn is offered each miner and 
that he be given a fair chance to obtain the same. The checkweigh- 
man shall keep a turn bulletin for the turn keeper's guidance. The 
drivers shall be subject to whomever the mine manager shall designate 
as turn keeper in pursuance hereof. 

Deaths and Funerals 

In the case of an instantaneous death by accident in the mine, the 
miners and underground employees shall have the privilege of discon- 
tinuing work for the remainder of that day; but work, at the option 
of the operator, shall be resumed the day following and continue 
thereafter. In case the operator elects to operate the mine on the day 
of the funeral of the deceased, as above, or where death has resulted 
from an accident in the mine, individual miners and underground 
employees may, at their option, absent themselves from work for 
the purpose of attending such funeral, but not otherwise. And 
whether attending such funeral or not, each member of the U.M.W. 
of A., employed at the mine at which the deceased member was 
employed, shall contribute fifty (50) cents and the operator twenty- 
five ($25) dollars for the benefit of the family of the deceased or his 
legal representatives, to be collected through the office of the company. 
In the event that the mines are thrown idle on account of the miners' 
or other employees' failure to report for work in the time intervening 
between the time of the accident and the funeral, or on the day of 
the funeral, then the company shall not be called upon for the pay- 
ment of the twenty-five ($25) dollars above referred to. 



690 MATERIALS FOR ELEMENTARY ECONOMICS 

Except in cases of fatal accidents, as above, the mine shall in no 
case be thrown idle because of any death or funeral; but in the case 
of the death of any employee of the company or member of his family, 
any individual miner may, at his option, absent himself from work 
for the purpose of attending such funeral, but not otherwise. 

Doctor 

No deduction shall be made for doctors, unless such deduction is 
authorized by the individual employee. 

Condition of the Mine 

The company shall keep the mine in as dry condition as practi- 
cable, by keeping the water off the road and out of the working places. 
When a miner has to leave his working place on account of water, 
through the neglect of the company, they shall employ said miner 
doing company work when practicable, and provided that said miner 
is competent to do such work, or he shall be given another working 
place until such water is taken out of his place. 

Provisions for Injured 

The operators shall keep sufficient blankets, oil, bandages, etc., 
and provide suitable ambulance or conveyance, readily available at 
each mine to properly convey injured persons to their homes after 
an accident. 

Powder 

The price of powder shall be $2 . 00 per keg during the term of this 
contract. 

igo6 Joint Convention 

It is agreed that the Southwestern Interstate Coal Operators' 
Association and the representatives of the United Mine Workers of 
America shall meet in the city of IndianapoHs, Indiana, on the 25th 
day of January, 1906, at 10 o'clock a.m. 



LABOR PROBLEMS 



691 



108. A PIECE-WORK WAGE-SCALE AGREEMENT' 



CHINA 



HANDLING 



Coffee Pots, all sizes $0.20 

Cups, ordinary shapes 04I 

" Tulip 05 

" A. D. Coffees, Special. . . 07 

Jugs, Whiskey 08 

Mugs, all shapes 06 



Mustards $0 .04 

Sugars, 24s 08 

30s 08 

" 3bs 08 

" 42s 08 



JIGGERING 



Basins, Plain, 9s 

Butters, Individual, Plain. . 
Butters, Loose Drainer. . . . 

" Fast Drainer 

" Covered, complete. 

Bowls, Oyster 

Bowls, Punch, 9 inch 

" " 10 inch . . . 



11 inch 

12 inch 

13I inch 

15 inch 

Cake Covers, made for turners. . 

" " to be sponged .... 

Compotes, all sizes, foot thrown 

Cups, with ball. Turned ... 2^ to 

Fruits, Plain 

Ice Creams, Plain 

Ice Tubs, 8§ inch, Turned 

9^ inch 

" 10 inch 

Nappies, Plain, 3 inch 

" 4 inch 

" 5 inch 

" 6 inch 

" 7 inch 

" 8 inch 

" 9 inch 

Nappies, Fluted, 5 inch 

Plates, Flat, Plain, 4 inch 

" 5 inch 



•35 
03^ 
50 
55 
60 
04 
28 
28 
28 
28 
40 
40 
04 
06 
10 
04 
03 1 
032 
40 

45 
50 
07 
07 
07 
10 
10 
10 
10 

13 
04 
04 



Plates, Flat, Plain, 5^ inch. . . 

« 6 inch... 

« 6iinch... 

" 7 inch... 

" " 7iinch... 

« 8 inch... 

Plates, Flat, Festoon, 4 inch. 

5 inch. 

51 inch. 

" . " 6 inch. 

6§inch. 

7 inch. 
7^ inch. 

8 inch, 
inch. . 
inch . . 
inch . . 
inch . . 
inch . . 
inch . . 
inch . . 

Plates, Deep, Festoon, 5 inch 
Sl inch 
" 6 inch 
" 6|inch 
" 7 inch 
" 7|inch 
« 8 inch 

Plates, Coupe Soup, 6 inch. 
'\ "7 inch. 

Saucers, Plain 



Plates, Deep, Plain, 5 

52 

« " « 6 

" « " 6^ 

u u u 

U U « _1 

72 



$0.05 

OS 
c6 

07 

07 
08 

05 

OS 

06 
06 
07 
07 
08 
08 
05 

061 

07 
07 
08 
08 
06 
07 

07 

08 

08 

09 

09 

06 

063 

04 



THROWING 



Brush Vases Net $0.09 

Coffee Mugs Net 09 

Coffee Pots, Vienna, is Net 13 

" _ 2s Net 13 

Compotes, Feet, 5 inch Net 10 

" 6 inch Net 10 



Compotes, Feet, 7 inch Net $0.10 

" " 8 inch Net 12 

" " 9 inch Net 12 

Creams, Vienna, is Net 05 

" " 2s Net 06 

" " 3s Net 07 



' From the official booklet. Wage Scale aiid Agreements between the Utiited Slates 
Potters' Association, and the National Brotherhood of Operative Potters, Adopted 
October i, 1905. 

[The passage here reproduced is only a small portion of the original document. 
The complete text of the agreement covers some fifty pages. — Editors.] 



092 



MATERIALS FOR ELEMENTARY ECONOMICS 



Custards, small Net$o.o5 

" large Net 06 

Egg Cups, Double Net 06 

" Single Net 05 

Match Safes, Cornick, is. . .Net 09 

« " " 2s...Net 09 

« " " 3s. . .Net 09 

Match Safes, Flat Footed. . . Net 18 

" " French B, IS.. Net 11 

" « " .2s..Net IS 

Molasses Cans, Barrel Net 11 

Mustard Barrel and Cover.. Net 08 

Mustards, Vienna Net 08 



Mustards, New York Netfo . 1 1 

Mugs, 42s Net 04 

" 36s Net 05 

" 30s Net 06 

" 24s Net 07 

Q. M. D. Cans Net 25 

Spittoons, small Net 25 

" large Net 30 

Sugars, Round, Covered, all 

sizes Net 13 

Whiskeys, i quart Net 20 

" I pint Net 15 

" I pint Net 11 



Bowls, Oyster, Single Thick,42sJi 

« « « « ^5g 

« « « « ^og 

« " 24s 

Bowls, St. Dennis, 36s 

30s 

24s 

Bowls, Tulip, 30s 

" 36s 

« 42s 

Cake Covers, knobbed 

Coffees, Extra Thick 

« Culot 

A. D. Culot 

Coffee Pots, Vienna, complete . . 

Compotes, 5 and 6 inch 

" 7 and 8 inch 

" 8§ inch 

" 9 inch 

Compotes, Sticking up 

Creams, No. i 

" No. 2 

No. 3 

Cups, Custard 

Cups, Tea, Single Thick 

« Coffee, 

" Tea, Double Thick 

" Coffee, " 

" A. p.. Thin 

Cups, Tulip, Teas 

« " Coffees 

Egg Cups, Double 

" Single. 



TURNING 

io .07I Ice Tubs, Small $0 .35 

o8§ " Large 45 

095 " Footed 60 

10^ Jugs, Whiskey 30 

06 Match Safes, No. i 12 

o6| " " No. 2 II 

07 « « No. 3 10 

085 Molasses Cans 20 

07I " " Extra Large ... . 35 

07 Mugs, Cable, 42s 09 

15 " " 36s 09 

osl " " 30s 10 

06 " " 24s II 

05 Mustards, Bodies 08-09 

20 " Covers 08-09 

25 Oysters, Gov 102 

30 " Plain o8i 

35 Salads, s inch 12 

40 " 6 inch 14 

18 " 7 inch 16 

09 " 8 inch 18 

09 " 9 inch 20 

10 Spittoons, Low 30 

09 " High 35 

04 Sugars, Hotel, complete 17 

041 " " Covers o8| 

04^ Sugars, Round, 42s, complete. . 16 

05 " " 36s, " .. 17 
04I " " 30s, « .. 18 
04I " " 24s, " .. 19 
OS " " Covers, 36s 08^ 

10 " « " 30S.... 09 
09 " « « 24s.... 09! 



LABOR PROBLEMS 693 

199. THE ATTITUDE OF THE TYPOGRAPHICAL UNION 
TOWARD MACHINERY' 

It is probably not far wrong to say that trade unionists universally 
regard the introduction of new machinery as a misfortune. With the 
possible exception of a very few industries, like the cotton manu- 
facture, in which machine production has already been long and highly 
developed, a new machine always appears to the workingman as a 
displacer of men, a creator of unemployment, a depresser of wages. 
Trade-union leaders, even when they express their acceptance of the 
advance of machine production as a necessary feature of social prog- 
gress, usually manifest the feeling that, if it is not inevitably at the 
expense of the workingman, it at least increases the difficulty of 
maintaining his economic position. It is doubtful whether any union 
which felt strong enough to keep machinery out of its trade ever 
submitted without a contest to the introduction of it. The experience 
of long years has taught the unions, however, that in general the intro- 
duction of machinery cannot be prevented, and direct attempts to 
keep it out are now comparatively few. 

The unions that have fared best in their dealings with machinery 
are those that have frankly and promptly recognized the inevitable- 
ness of it, and have devoted their energies, not to the hopeless task of 
preventing the use of it, but to regulating the manner of use. Prob- 
ably no union in this country furnishes a better example of a wise 
policy toward machinery than the International Typographical 
Union. When the typesetting machines began to be introduced, 
the union promptly accepted them as inevitable, and only insisted 
that they be operated exclusively by members of the organization, and 
on union terms. If the attempt had been made to keep the machines 
out of printing offices, the fate of the hand compositors might possibly 
have been comparable with that of the hand weavers, who tried a 
hundred years ago to compete with the power loom. The union 
would have been driven out of all important printing offices, the 
machines would have been run by nonunion hands; wages, both of 
machine operators and of hand compositors, would have been cut, 
and hours of labor would have been lengthened. By the policy which 
the union adopted the number of its members who were thrown out 

' From the Report of the Industrial Commission (1901), XVII, Ix-lxi. 
[For another discussion cf the effects of machinery in displacing skilled labor 
see Selection 39: "Immigration and the Use of Machinery." — Editors.) 



694 MATERIALS FOR ELEMENTARY ECONOMICS 

of employment by machines was greatly diminished, wages were 
maintained and gradually raised, hours were gradually shortened. 
The union has been able to secure for its members a share of the 
benefits of the machine, instead of seeing all its benefits, together with 
a portion of the advantages which they themselves had previously 
enjoyed, divided between the employing printers and the community 
at large. The wage scales for machine operators are uniformly 
maintained at least as high as those of hand compositors, and in many 
cases higher; and in most places the hours of machine operators are 
shorter. 

200. THE DAYTON EMPLOYERS' ASSOCIATION' 

The Dayton Employers' Association was organized in June, 1900, 
with thirty-eight charter members, and was probably the first asso- 
ciation formed for the definite purposes set forth in its constitution, 
as follows: 

First — To protect its members in their right to manage their 
respective businesses, in such lawful manner as they may deem proper. 

Second — The adoption of a uniform legitimate system whereby 
members may ascertain who is, or who is not, worthy of their employ- 
ment. 

Third — The investigation and adjustment, by proper officer or 
committees of the association, of any question arising between 
members and the employees, when such question shall be submitted 
to the association for adjustment. 

Fourth — To endeavor to make it possible for any persons to 
obtain employment without being obliged to join a labor organiza- 
tion, and to encourage all such persons in their efforts to resist the 
compulsory methods of organized labor. 

Fifth — To protect its members in such manner as may be 
deemed expedient and proper, against legislative, municipal, and other 
political encroachments. 

Certainly it was the first association organized on the basis of 
including in its membership manufacturers, building contractors, 
merchants, and employers engaged in every character and class of 
business or trades. 

' Adapted from a pamphlet, Benefits of Employers' Associations, by A. C. 
Marshall, formerly secretary of The Dayton Employers' Association. 



LABOR PROBLEMS 695 

201. THE NATIONAL FOUNDERS' ASSOCIATION' 

Organized. — In 1898, by a limited number of foundry proprietors. 

Why organized. — Because the foundrymen who became its charter 
members found themselves at the mercy of foundry labor unions — 
chiefly among iron molders — and with broadminded foresight con- 
cluded that the effect of organizations of labor must be held in check 
by organizations of employers if the foundry industry were to remain 
upon a sound financial basis. 

Its aims and purposes. — The adoption of a uniform basis for 
just and equitable dealings between members and their employees, 
whereby the interests of both will be properly protected. 

Character of membership. — Persons, firms, or corporations engaged 
as principals in and operators of foundries where castings in iron, 
steel, brass or other metals are made. 

The Association has now been in existence 1 2 years, during which 
it has retained upon its rolls continually a representative class of 
foundry proprietors, who have been influenced in the continuation 
of their membership year after year, by the broadminded desire to 
accomplish as much as possible for the general good of the entire 
industry as a result of concerted action. Motives of selfish gain 
have not been influential in the maintenance of the Association. 

Its early policy. — The foundrymen first comprising the member- 
ship of the N.F.A. made a decided attempt to meet the union of 
iron molders and arrange a system of agreements based upon the 
theory of "collective bargaining." 

Seven years, during which approximately 2,500 conferences with 
iron molders' union officials were held, were devoted to an attempt 
to work out this policy. Ultimately this was found impossible 
because of the adherence of the union to rules and regulations which 
it had adopted for its own guidance as far back as 1859. 

The failure of the union to appreciate the progressiveness of the 
age necessitated the adoption by the N.F.A. of an entirely independent 
policy. 

Its present policy. — Was adopted November, 1904, and has been 
maintained successfully ever since. 

This policy declares against union limitations of the foundry 
output or the earning capacity of the employee; against the imposition 
by labor unions of fines and restrictions upon the workmen; in favor 

' Adapted from a pamphlet, Concise Information Regarding the National 
Founders'' Association, issued by the Association, May, 191 1. 



696 MATERIALS FOR ELEMENTARY ECONOMICS 

of a fair day's pay for a fair day's work and the right of the employer 
to employ whomsoever he may wish without regard to union affilia- 
tion; that all workmen shall be required to work peacefully and 
harmoniously with fellow workmen; against the limitation of the 
employment of apprentices or unskilled help and in favor of the right 
of the foundryman to introduce molding machines and improved 
appliances and operate them with whatever class of labor he may 
select. 

Character of support accorded members during strikes. — By procur- 
ing workmen to take the places of strikers; by having the members' 
castings made elsewhere; by granting compensation to the member 
on the basis of idle floors during the strike. 

Dissemination of literature among workmen. — Every American 
labor union today possesses its weekly or monthly publication sent 
to the homes of workmen, preaching the doctrines of trade unionism. 
There are nearly 400 of these publications. 

ReaHzing the demoralizing effects of the dissemination of this 
literature, the N.F.A. began five years ago to send its own publica- 
tion into the homes of iron molders in order that they might learn 
the employers' side of the case. 

The Review is now sought by the best element among the molders 
and is valued far in excess of any of the union journals. The results 
of this educational work have already proved it of inestimable value, 
and it should be extended to all branches of the trade. 

In this work the N.F.A. is the pioneer of all employers' associa- 
tions. 

National legislation at Washington. — The efforts of union labor 
to secure pernicious class legislation at Washington are fraught with 
danger to the manufacturer. The National Founders' Association 
has been most active in working for the protection of the interests 
of the foundry industry in preventing the passage of legislation of 
this character. 

Results. — The iron molders' union has been compelled to alter 
its ratio of apprentices in union shops. 

It has been compelled to surrender control of the molding machine 
in the jobbing and machinery foundry. 

It has been compelled to refrain from its slugging and murderous 
tactics in fighting strikes. 

It has been compelled to abandon its policy of attempting to 
prevent a union foundry from making castings from a struck shop. 



LABOR PROBLEMS 697 

It has been compelled to recognize the growing practice of employ- 
ing unskilled workmen in the production of lower grades of castings 
by making provision to admit these workmen into the union under 
a special charter. 

It has been compelled to admit that there is little or nothing to 
be gained by agreements between foundrymen and this union. 

It has surrendered its demands for closed shop written agreements 
where there is the slightest opposition. 

It has surrendered its position of independence toward kindred 
organizations and applied to them for assistance. 

It has surrendered its claim of lack of demands upon its members 
for excessive assessments by increasing its dues 60 per cent. 

It has surrendered its boastful independence and claims of 
hundreds of thousands of dollars on deposit. 

Its individual members, in certain localities, have been compelled 
to pay their local and national unions over $136.00 each per year 
for assessments. 

Its membership has been depleted to such an extent as seriously 
to reduce its revenue and exhaust its reserve resources. The defeat 
of this union in its 1906 strike reduced its membership over 50 per 
cent. 

Instead of being compelled to devote their entire time to receiv- 
ing and dealing with demands from the molders' union as heretofore, 
foundrymen are now giving their attention to the introduction of 
improvements. Shops without number are today immune from these 
difficulties which three years ago were confronting them daily. 

Wholesale defeat of the molders' union, through the N.F.A., in 
strikes during the past 6 years has so diminished the union influence 
in the one item of "restriction of output" as to be worth millions of 
dollars to the foundry industry. 

Some foundry proprietors estimate their increased output, as a 
result of the removal of union influence, at 10 per cent; others at 
25 per cent and still others estimate as high as 100 per cent; this 
latter figure is known to be correct in many instances where molding 
machines were introduced. 

Cost of initiation for new members. — Based entirely upon the 
number of employees engaged in the foundry as follows: 

For each floor molder, $2.50; for each bench molder and core- 
maker, $1.87^; for each apprentice, molding machine operator or 
specialty molder not skilled in the general trade, $1.25. 



698 MATERIALS FOR ELEMENTARY ECONOMICS 

This is payable but once and then not until the new member is 
notified of his election. 

Amount of regular dues. — These are payable quarterly, based 
upon reports made by the member. The rates (based on the average 
number employed) are as follows: 

For each floor molder, 40 cents per month ; for each bench molder 
and coremaker, 30 cents per month; for each apprentice, molding 
machine operator or specialty molder not skilled in the general trade, 
20 cents per month. 

Foundry laborers, helpers, cupola tenders, chippers, etc., are not 
subject to assessment under this schedule of employees. 

202. THE UNITED TYPOTHETAE OF AMERICA' 

The United Typothetae of America is a voluntary association 
of master printers organized to advance the interests of its member- 
ship in particular and incidentally to bring about better conditions 
in the entire printing industry — an industry, by the way, which ranks 
seventh in importance in the United States. When the Typothetae 
was organized, twenty-four years ago, it was brought into being 
because of the crystallization of the belief that an organization 
of master printers was a necessity. Theretofore the employers 
were unorganized, though their employees were acting as a unit in 
practically all branches of the business. 

While more or less attention has always been paid to questions 
of costs and other matters relating to efficiency and management, 
it was not until about three years ago, that the organization as a 
whole saw the necessity of broadening the scope of its work to an 
extent that would permit it to include everything which in any way 
has a bearing on the interests and welfare of its membership. With 
the adoption of this broader policy it was decided to drop from con- 
sideration, so far as the national body was concerned, the question 
of whether shops were to be "open" or "closed," as it was seen that 
this was a matter which could best be handled by the local branches 
or by the individual plant. 

That the new policy was a move in the right direction is proven by 
the astonishing increase in the membership of the United Typothetae 

' Adapted from a pamphlet, United Typothetae of America, What It Is and 
What It Stands For, issued by the Association, June, 191 1. 



LABOR PROBLEMS 699 

of America since its adoption. Membership in the Typothetae is 
now seen to be, indirectly, a source of actual profit, for the expense 
is merely nominal and the benefits great. The following statement 
of its aims and objects shows its broad field of endeavor: 

Education of printers in matters of cost of production. 

Education of printers in the benefits of organization, keeping 
especially in mind the greater power of one than of several associations. 

The encouragement of more friendly relations and of greater 
confidence between printers, regardless of whether they are located 
in the same city or in widely scattered sections. 

The promotion of trade schools for the education of printers. 

The installation, under the supervision of experts, of scientific 
cost-finding systems. 

The maintenance of credit bureaus. 

The standardization of printing plants. 

Suggesting plans for the rearrangement of workrooms, to the 
end that there may be greater economy in the expenditure of time. 

The establishment of satisfactory trade relations with paper- 
dealers, supply houses, machinery-builders, and all those from whom 
equipment or supplies are purchased. 

The standardization of shop practices. 

The promotion of mutual fire insurance companies. 

The education of printers in the principles of scientific manage- 
ment. 

The maintenance of a free employment bureau. 

The education of managers and men in matters of efficiency. 

Education in the essentials of time requirements as they relate 
to all the processes entering into the production of printing. 

Advising the membership concerning the purchase of new 
machinery or other equipment. 

All other matters coming up from time to time which in any way 
affect the interests of the master printer. 

The above is the platform of the United Typothetae of America. 
It will be seen that almost every item must be taken up nationally 
if anything worth while is to be accomplished. So far as insurance 
is concerned, two mutual companies have already been formed through 
the influence of the Typothetae, and the organization is supporting 
the School of Printing at Indianapolis both morally and financially. 



700 MATERIALS FOR ELEIkIj:NTARY ECONOMICS 

203. INDUSTRIAL UNIONISM AND THE INDUSTRIAL 
WORKERS OF THE WORLD' 

The principle upon which industrial unionism takes its stand is 
the recognition of the never-ending struggle between the employers of 
labor and the wage- working class. The members of the wage- working 
class, as a rule, have but one means of existing in the present capitalist 
state, viz., the sale of their labor power to the employing class. The 
employer uses the labor power of the worker for one purpose, to oper- 
ate the machinery, or develop the resources, to which he has the title 
of ownership, and over which he has control. 

In emplo5dng labor he is guided by Exactly the same principle that 
directs him in the purchase of raw materials, or undeveloped resources, 
namely, to purchase the labor power necessary to his purpose, and pay 
as little for it as possible. 

The workers, on the other hand, are driven by every circumstance 
to strive for as much as they can obtain of the values they create. 
For upon the amount which they as workers so obtain depends the 
very existence of themselves and those dependent upon them. The 
necessities of life, the degrees of comfort, of pleasure, of intellectual 
advancement, and of physical well-being; in short, their standard of 
living must inevitably depend upon the amount of the working wage. 

The employer, the buyer of labor power in the labor market, desires 
large returns in the shape of profits upon his investment. Large 
profits in capitalist production in the last analysis mean but one thing, 
low wages, and generally inferior working conditions, for the class 
that exists through the sale of its labor power. Higher wages and 
improved working conditions, as a rule, mean smaller profits. These 
opposing economic forces, each striving to advance its own interests, 
are engaged in a never-ending struggle for supremacy in the field 
of production. A large majority of the working class today do not 
understand the struggle in which they are engaged, nor the cause from 
which it springs — the opposed economic interests of themselves and 
the capitalist class. As a result, in struggling for what they think 
are their interests, they fight in the dark, and thus have contributed 
and still contribute to their own defeat and continued subjection, 
directly and indirectly. 

This, then, makes it imperative that the Industrial Union, to 
fulfil its mission as an organization of the working class, must take its 

' Adapted from the pamphlet, Industrial Unionism and the I.W.W ., by Vincent 
St. John. Press of the I.W.W. Pubhshing Bureau. 



LABOR PROBLEMS 701 

Stand upon a recognition of this struggle. It must educate its mem- 
bership to a complete understanding of the principles and causes 
Underlying every struggle between the two opposing classes. 

The craft plan of organization is a relic of an obsolete stage in the 
evolution of capitalist production. At the time of its inception it 
corresponded to the development of the period: the productive 
worker in a given industry took the new raw material, and with the 
tools of the trade, or craft, completed the product of that industry, 
performing every necessary operation himself. As a result, the 
workers combined in organizations, the lines of which were governed 
by the tools that they used. At that period this was organization. 
Today, in view of the specialization of the process of production, 
the invention of machinery, and the concentration of ownership, it is 
no longer organization, but division. And division on the economic 
field for the worker spells defeat and degradation. 

Take a leading industry of this country today, as a concrete 
example, and see what craft division means to the workers in that 
industry; the railroad industry for instance. In order to operate a 
railroad the labor of many workers is required. They are divided 
into the following organizations operating upon the theory that the 
interests of the railroad corporation and of their particular organiza- 
tion are identical: the engineers in the Brotherhood of Locomotive 
Engineers; the firemen in the Brotherhood of Locomotive Firemen 
and Engineers; the conductors in the Order Railway Conductors; 
the brakemen in the Brotherhood Railway Trainmen; the switchmen 
in the Switchmen's Union; the freight handlers in another organiza- 
tion; the telegraphers in another; the section men in another; the 
machinists, boiler-makers, car-repairers in separate organizations. 
The rest of the workers are, for the most part, without organization 
at all. The reason for this is that the organizations above-named 
make no attempt to fortify their own position by organizing the unor- 
ganized workers in the industry. They are under the false belief 
that their own organization is sufficient in and by itself. 

Each of the above-named organizations is working under a con- 
tract for a certain length of time. Their membership is bound by 
the organizations to remain at work so long as the railroad company 
lives up to the terms of the contract, and, for the most part, the 
contracts of the different periods. The railroad management is thus 
insured against havmg to subjugate more than a part of its employees 
at any given time. The result of this condition of affairs is that when- 



702 MATERIALS FOR ELEMENTARY ECONOMICS 

ever any branch of the workers in this industry enters into a conflict 
with the employer, they have not only to combat the resources of 
that employer, but also their fellow-workers in the same industry 
who remain at work, and assist the employer in the operation of the 
railroad. In every instance, the defeat is due to the lack of united 
action by the workers, part of them being compelled to remain at 
work in observance of their sacred agreement with the employer. 
They are simply blinded by the wrong principles and methods of their 
organizations. 

Contrast this state of affairs with what would be the case, were 
these workers organized on the plan of the I.W.W., and educated in 
the principles on which it is based. The railway workers operating 
from any given division point would be organized under one charter, 
covering that industry for that division, a local Industrial Union of 
Transportation Workers. The workers composing that local indus- 
trial union would be branched, so as to permit the workers of each 
department to meet, discuss and decide all questions. For instance, 
the engineers and firemen, would meet as such to discuss and decide 
upon the conditions concerning the working conditions of their respec- 
tive departments. The train crew would do likewise. Cooks, waiters, 
and porters would form another branch for the purpose of legislation as 
to their working conditions, and so on, with depot employees, tele- 
graphers, dispatchers and towermen, machinists, boilermakers and 
repairmen, trackwalkers and sectionmen, yardmen, switchmen, 
flagmen, and crossing-tenders — until all the employees in that industry 
were organized in the branches to which they belonged by reason of 
the particular department in which they worked. Each branch 
would be represented in the Industrial Union by a delegate or dele- 
gates. These branches would be integral parts of the local Industrial 
Union. These delegates, upon meeting, would discuss the instructions 
received from the branches, confer together as representatives of the 
industry, and formulate the working conditions for the industry as a 
whole into demands. A representative of each branch would consti- 
tute the committee that would appear before the railroad managers, 
receive their reply and report back to the membership they repre- 
sented. The membership would then decide upon their course of 
•action, and instruct their local industrial union through its committee 
to proceed to carry such decision into effect. Wherever necessary, 
the question would be taken up to the National Industrial Union, 
composed of all local transportation industrial unions. Thus, when 



LABOR PROBLEMS 703 

necessary, united action of the workers would result in the entire 
industry. If, in order to enforce their demands, it became necessary 
to cease work, a vastly different state of things from that first men- 
tioned would confront the railway management. No part of the 
workers would be found as union men assisting in the operation of a 
scab railroad, for the simple reason that correct principles, backed 
up by correct and up-to-date organization, would have prepared the 
way for united action on the part of the workers in that industry. 
The Industrial Workers of the World is in existence to gain control 
of the machinery of production, and then to operate it, distributing 
the wealth so produced to all who by brain or muscle have contributed 
in producing the joint product. To make possible the achievement of 
this result it offers the following Preamble as a statement of its 
principles : 

The working class and the employing class have nothing in common. 
There can be no peace so long as hunger and want are found among millions 
of the working people and the few, who make up the employing class, have 
all the good things of life. 

Between these two classes a struggle must go on until the workers of the 
world organize as a class, take possession of the earth and the machinery 
of production, and abolish the wage system. 

We find that the centering of the management of industries into fewer 
and fewer hands makes the trade unions unable to cope with the ever-grow- 
ing power of the employing class. The trade unions foster a state of affairs 
which allows one set of workers to be pitted against another set of workers 
in the same industry, thereby helping defeat one another in wage wars. 
Moreover, the trade unions aid the employing class to mislead the workers 
into the belief that the working class have interests in common with their 
employers. 

These conditions can be changed and the interest of the working class 
upheld only by an organization formed in such a way that all its members 
in any one industry, or in all industries if necessary, cease work whenever a 
strike or lockout is on in any department thereof, thus making an injury to 
one an injury to all. 

Instead of the conservative motto, "A fair day's wages for a fair day's 
work," we must inscribe on our banner the revolutionary watchword, 
"Abolition of the wage system." 

It is the historic mission of the working class to do away with capitalism. 
The army of production must be organized, not only for the everyday 
struggle with capitalists, but also to carry on production when capitalism 
shall have been overthrown. By organizing industrially we are forming the 
structure of the new society within the shell of the old. 



704 MATERIALS FOR ELEMENTARY ECONOMICS 

And as a working program by which to build, it proposes the fol- 
lowing rules: 

All power vests in the general membership through the initiative and 
referendum and the right of repeal and recall. 

Universal transfer system and recognition of cards of union workers of 
all countries; one initiation fee to be all that is required, and this is to be 
placed at such a figure that no worker will be prevented from becoming a 
union man or woman because of its amount. 

A universal label, badge, button and membership card, thus promoting 
the idea of solidarity and unity amongst the workers. 

A defense fund to which all members shall contribute. 

The final aim of the industrial union will be to place the working class 
in possession of the wealth-producing machinery, mills, workshops, factories, 
railroads, etc., that the labor of the working class has created. 

This aim cannot be accomplished while the workers are divided upon 
the field of production, as they have been in the past and are today. It can- 
not be accomplished until the workers, in an organization of and by the 
working class alone, educate themselves to carry on production in their 
own behalf. 

Until sufficient numbers of the workers are educated to accomplish 
this task, the battle of the worker in capitalist society must be fought, and 
industrial unionism offers the only weapon with which the worker can hope 
to successfully combat the power of the employing class on the economic 
field. 



LABOR PROBLEMS 



70s 



204. STATISTICS OF THE EXTENT OF STRIKES' 

Strikes, Establishments Involved, Strikers, and Employees Thrown Out of 
Work, by Years, i 881 to 1905 





Strikes 


Establishments 


Strikers 


Employees Thrown 
Out of Work 




Number 


Average 
per strike 


Number 


Average 
per strike 


Number 


Average 
per strike 


I88I 

1882 

1883 

1884 

i88c 

1886 

1887 

1888 

1889 

1890 

1891 

1892 

1893 

1894 

189s 

1896 

1897 

1898 

1899 

1900 

1901 

1902 

1903 

1904 

190S 


471 

454 

478 

443 

645 

1,432 

1,436 

906 

1,075 

1,833 

1,717 

1,298 

1,305 
1,349 
1,215 
1,026 
1,078 
1,056 
1,797 
1,779 
2,924 
3,162 
3,494 
2,307 
2,077 


2,928 
2,105 
2,759 
2,367 
2,284 
10,053 
6,589 
3,506 
3,786 

9,424 
8,116 
5,540 

4,555 
8,196 

6,973 

5,462 

8,492 

3,809 

11,317 

9,248 

10,908 

14,248 

20,248 

10,202 

8,292 


6 

4 
5 
5 
3 
7 
4 
3 
3 
5 
4 
4 
3 
6 

5 
5 
7 
3 
6 

5 
3 
4 
5 
4 
4 


2 
6 
8 
3 
5 

6 
9 
5 
I 

7 
3 
5 
I 

7 
3 
9 
6 

3 

7 
5 
8 

4 



101,070 
120,860 
122,198 
117,313 
158,584 
407,152 
272,776 
103,218 
205,068 
285,900 
245,042 
163,499 
195,008 

505,049 
285,742 
183,813 
332,570 
182,067 
308,267 
399,656 
396,280 

553,143 
531,682 

375,754 
176,337 


215 
266 
256 
265 
246 
284 
190 
114 
191 
156 
143 
126 
149 
374 
235 
179 

309 
172 
172 
225 
136 
17s 
152 
163 
85 


129,521 
154,671 
149,763 
147,054 
242,705 
508,044 
379,676 
147,704 
249,559 
351,944 
298,939 
206,671 

265,914 
660,425 

392,403 
241,170 
408,391 
a) 249,002 
417,072 
505,066 
543,386 
659,792 
656,055 
517,211 
221,686 


275 
341 
313 
332 
376 
355 
264 
163 
232 
192 
174 
159 
204 
490 
323 
23s 
379 
0)236 
232 
284 
186 
209 
188 
224 
107 


Total . . . 


36,757 


181,407 


4-9 


6,728,048 


183 


0)8,703,824 


0)237 



o) Not including two strikes involving 33 establishments not reported. 

'From the Twenty-first Annual Report [1906] of the U.S. Commissioner of 
Labor, p. 15. 



7o6 



MATERIALS FOR ELEMENTARY ECONOMICS 





<: 




W 




o 


w 


H 


^ 


i^ 


1— I 


H 


p^ 


S 


rn 


< 




« 


\^ 


O 


O 


s 






C/J 


^ 


<: 


n 


u 



H^ 






fO "Oco -^ O fO H 



O O O M rf ro 
O^ O 00 t^ O t-- 



cOOO ro H ' 



O OOO rt 0( f<) O 00 <N 



O.00 lo 


0> OiOOOO 
O-O O.CT 


lO IN rf 


OVO to 


^o o M o 

to GOO 


lO >o 



00 O -^00 o» ^+00 for^ fO oooOfO O'd- 



00 t^ t--. -nf t-^'O C* fO o 



O '+ O fO H O 



) o o-y^ i^O 



H H Oi'O 00^*0 00 I 
>-t tr^xTi O»O0 lovo 



00 >o M 


04 lO U^ Ct 


00 I> HI 


woo OO 






t^ o\ 0\ 


rf w Tf a 



. \ri 00 TfvO 00 Tj- 1 



PO O ^ !>. H 



ro i> fO fO W r^ o tnoo 



t-i 0» O^ OiQO On 
O 00 CO Ov -^ ro 



r^ rj- -it <N 00 '^ 



O^CO tJ- H 00 r*: 1 



O O>00 M -o 



O O vi^G looo 

vo lO '^t '^ "^ Oi 



> r^ i>^ O o* ^/to fooo vo Hf^ON ooohvo 



O>00 0\ -^^ ro O 
0>\0 T|- r-* O 



O 00 O O 




LABOR PROBLEMS 



707 





-1 'tOOO 




nn Nvo>o 


M -t MM 


000 Oi ^ •* 


0^ 1^00 ^ 


o» o» »O00 






Ht fO M tr) •ft' 


CO r^ « CO -^ 


M CO MM 


M trt t^oO 00 


1000 w 00 *^ 


M ro ct w 


•4-vo ^~ M 


>0 M M io>o 


VO (^ Tj- w 






►H o> 00 -a-^o 


>0 M 0. 






n m ■* « 


0> i^ CO r^ 0* 1 


t^vO fO c« Oi 1 




< t^ 00 fO N 








? "^ 


00 l^ t^ 


C 


r- V) i/^ w 


M w »y^\o ^ 1 




, ^ ^,^ 




s • •- 




^00 r^O M 


00 M t^ 0. 1 


MO M d CO 1 




IN WO ^ 








ft ■" 


S 


.' a 








.0 


. 








*n 


. u 








OJ 


'. ^ 








> 


V V 








^ 


s-s 








,*J 


.s ^ 








& 


^M 




<s 


73 


^"u 












3 


C 






s 


13 

B 


§^ 




"2 





'Tl W 




13 




«-irt 




'u 


3 


1^ 




K 


■3 






1 




0-5 




KJ 


Cl! 


-§1 


1 


§ 

C3 


_o 


^ ^ 




<a "^ «> tflj- 


^ 


2 i2 S-2--S 







J3J3 2^^ 


Ig 

S 


«ili 


>i >>j3 uj tn 


W) 


jj^.ti »> »J 


c 


la ta ^ 3 3 


1^ 




3 (3 





-*>> 



1 






2 3 

3 

1 I 
I E 

3 .a 

■S 3 

S ca 

« u 

to w 

.S 3 

3 3 



M O I- o . 

m D. m a 

2 2 2 2' 

.s I .s 3 : 

■a -I T3 ■" 

■w in "2 ■"' 
^ ^ 3 ■« ■ 

TJ Ji "3 4) 

.S 3 .9 ■§ • 

3 .3 3 3 

O ^ .2 ■" ■ 



ta 



ta 5 w .- 

'5 ^ tn "S 

«J .SP f M 

.2 ^ .3 I 

tj e ti > 



ta 3 _uj •- 



3 -2 11 ^ 



•2 ^1 






° 5 o 

4) O ^ 

" U 4J 

s § 



D " 4) S ° 9 ? 

S *S S o I ° i 



_o 



00^ 



U o " !> 

S " ja .2 • 
■2 « ^ u 

;S 3I "* = 

^=a g I 

a u " ^ 



ca 



3 



^^ 



' ^ - 

to i3 "rH 

y J3 .y 1n 

w ^ C -3 

.3 3 'i^ S 

^ S 3 .3 

3 I E fl 

■I -« -a E 

^ :3 3 -S 

•S -° 5 ^ 

■^ s ^ -s 

M CO 2 " 

M Ml bO M 

^3 3 3 c 

"U 'O "o T3 

_3 _3 _2 3 



■S "^ r^ 



Tl 


-^ 






u 




l-t 


J3 




u 


.i:^ 





3 


3 


M 




3 


jj 


■i-> 
















fcl 
J3 


J3 


F 




s 


e 


e 


• 1^ 




JS 


Si 






j= 


J2 


X> 


.m 


3 


J= 




.i' 




rt 
















ca 


s 


« 


5 




>o 


^ 


u 








u 


I* J 


N 


f 


3 


tH 





to 


bn 


M 






tn 


tifl 


bt\ 


3 








3 


.3 

T3 


a 


■fl 


■0 


fl 




■f^ 


-n 


3 


3 


3 




3 


-1 


3 


















J 


> 

.3 








3 


.3 


.3 


.3 


.3 



(J u (J U U 

3 g 3 3 3 

^o'So^Oo^»2oOf2,2i5 



7o8 MATERIALS FOR ELEMENTARY ECONOMICS 

206. ESTIMATES OF LOSSES DUE TO STRIKES AND LOCKOUTS 

a) TWENTY YEARS OF LOSSES FROM STRIKES AND LOCKOUTS' 





Strikes 


Lockouts 


Yea 


To Date when Strikers 
Were Re-employed or 
Employed Elsewhere 




To Date when Employees 
Locked out Were Re-em- 
ployed or Employed 
Elsewhere 










Loss of Em- 
ployers 






Loss of Em- 












ployers 






Assistance 






Assistance 






Wage Loss of 


to Employees 




Wage Loss of 


to Employees 






Employees 


by Labor Or- 
ganizations 




Employees 


by Labor Or- 
ganizations 




1881 


$ 3.372,578 


$ 287,999 


$1,919,483 


$ 18,519 


$ 3,150 


$ 6,960 


1S82 


9,864,228 


734,339 


4,269,094 


466,345 


47,668 


112,382 


1883 


6,274,480 


461,233 


4,696,027 


1.069,212 


102,253 


297,097 


1884 


7,666,717 


407,871 


3.393,073 


1,421,410 


314,027 


640,847 


1885 


10,663,248 


465,827 


4,388,893 


901,173 


89,488 


455,477 


1886 


14,992,453 


1,122,130 


12,357,808 


4,281,058 


549,452 


1,949,498 


1887 


16,560,534 


1,121,554 


6,698,495 


4,233,700 


155,846 


2,819,736 


1888 


6,377,749 


1,752,668 


6,509,017 


1,100,057 


85,931 


1,217,199 


1889 


10,409,686 


592,017 


2,936,752 


1,379,722 


115,389 


307,125 


X890 


13,875,338 


910,285 


5,135,404 


957,966 


77,210 


486,258 


1891 


14,801,505 


1,132,557 


6,176,688 


883,709 


50,195 


616,888 


1892 


10,772,622 


833,874 


5,145,691 


2,856,013 


537,684 


1,695,080 


1893 


9,938,048 


563,183 


3,406,195 


6,659,401 


364,268 


1,034,420 


1894 


37,145,532 


931,052 


18,982,129 


2,022,769 


160,244 


982,584 


189s 


13,044,830 


559,165 


5,072,282 


791,703 


67,701 


584,155 


1896 


11,098,207 


462,165 


5,304,235 


690,945 


6i,3SS 


357,535 


1897 


17,468,904 


721,164 


4,868,687 


583,606 


47,326 


298,044 


1898 


10,037,284 


585,228 


4,596,462 


880,461 


47,098 


239,403 


1899 


15,157,965 


1,096,030 


7,443,407 


1,485,174 


126,957 


379,36s 


I goo 


18,341,570 


1,434,452 


9,431,299 


16,136,802 


448,219 


5,447,930 


To 


tal $257,863,478 


$16,174,793 


$122,731,121 


$48,819,745 


$3,451,461 


$19,927,983 



b) LOSSES FROM THE ANTHRACITE COAL STRIKE OF 1902^ 

It is impossible to state with accuracy the losses occasioned by 
the strike, but fair estimates may be given. The total shipments 
of anthracite coal in 1902, according to a statement by Mr. Wm. 
W. Ruley, Chief of the Bureau of Anthracite Coal Statistics, were 
31,200,890 long tons. As compared with 1 901, when the shipments 
amounted to 53,568,601 long tons, this indicates a decrease of 22, 367,- 
711 long tons, or over 40 per cent. If the same decrease is assumed 
for the coal mined for local trade and consumption, the total decrease 
in production in 1902 amounted to 24,604,482 long tons, which at the 
price received in 1901 meant a decrease in the receipts of the coal- 
mining companies, for their product at the mines, of $46,100,000. 
Assuming the average wage cost to be about $1.25 per ton on market- 

' From the Sixteenth Annual Report [1901] of the U.S. Commissioner of Labor, p. 24. 
^From the "Report of the Anthracite Coal Strike Commission," Bulletin of 
the U.S. Bureau of Labor, VIII, 463. 



LABOR PROBLEMS 709 

able coal, and allowing for the wages paid to engineers, pumpmen, 
and others who remained at work during the strike, the mine em- 
ployees lost in wages a total of about $25,000,000. 

It may also be mentioned that, according to reports made at 
the recent convention of mine workers in Indianapolis, there were 
expended about $1,800,000 in relief funds. 

Assuming that 60 per cent of the total shipment represents the 
sizes above pea coal, the decrease in the shipments of these larger 
sizes in 1902, as compared with 1901, was 13,420,627 long tons. 
With an average price at New York Harbor of $4 . 09 per ton, and with 
35 per cent of the receipts charged to transportation expenses, the 
decrease in freights paid to the railroad companies on these larger 
sizes, if it had all been sent to New York Harbor, would have been 
about $19,000,000; and assuming the freight rate of $1 per ton on 
the smaller sizes, the total decrease in freight receipts of the trans- 
portation companies would have been about $28,000,000. 



. 207. UNEMPLOYMENT AND A PROPOSED SOLUTION OF 
THE PROBLEM^ 

We have, therefore, to report: 

1. That distress from want of employment, though periodically 
aggravated by depression of trade, is a constant feature of industry 
and commerce as at present administered; and that the mass of men, 
women, and children suffering from the privation due to this unemploy- 
ment in the United Kingdom amounts, at the best of times, to hun- 
dreds of thousands, while in years of trade depression they must 
exceed a million in number. 

2. That this misery has no redeeming feature. It does not, like 
the temporary hardships of work or adventure, produce in those 
capable of responding to the stimulus, greater strength, energy, 
endurance, fortitude, or initiative. On the contrary, the enforced 
idleness and prolonged privation characteristic of unemployment 
have, on both the strong man and the weak, on the man of character 
and conduct, and on the dissolute, a gravely deteriorating effect on 
body and mind, on muscle and will. The magnitude of the loss thus 
caused to the nation, first in the millions of days of enforced idleness 
of productive laborers, and secondly in the degradation and deteriora- 

' Adapted from the minority report of the Royal Commission on the Poor 
Laws (1909), pp. 1177-78 and 1215-17. 



7IO MATERIALS FOR ELEMI^NTARY ECONOMICS 

tion of character and physique — whether or not it is increasing — can 
scarcely be exaggerated. 

3. That men in distress from want of employment approximate 
to one or other of four distinct types, requiring distinct treatment; 
namely, the men from permanent situations, the men from discontinu- 
ous employment, the underemployed, and the unemployable. 

4. That what is needed for the men from permanent situations, 
is some prompt and gratuitous machinery for discovering what open- 
ings exist, anywhere in the United Kingdom, for their particular 
kind of service; or for ascertaining with certainty that no such open- 
ings exist; with suitable provision, where individual saving does not 
suffice, for the maintenance of themselves and their households whilst 
awaiting re-employment. Both the machinery and the provision are 
at present afforded, in some industries, by trade-union "Vacant 
Books" and trade-union insurance. This, however, does not meet 
the need of the large numbers of men in occupations for which no 
trade-union exists, or in which no machinery for reporting vacancies 
and no insurance against unemployment have been organized. Nor 
does it meet the cases, unhappily always occurring in one industry 
or another, of men whose occupation is being taken from them by 
the adoption of new processes or new machinery, without any effective 
opportunity being afforded to them of training themselves to new 
means of livelihood. 

5. That for the men of discontinuous employment the same 
prompt and gratuitous machinery for discovering what openings 
exist, ' anywhere in the United Kingdom, is required, not only for 
individuals exceptionally unemployed, but for the entire class, at all 
times; in order to prevent the constant "leakage" of time between 
job and job, and to obviate the demoralizing aimless search for work, 
whether over any one great urban aggregation, or by means of wander- 
ing from town to town. The same machinery becomes imperative, 
in times of bad trade, in order to ascertain with certainty that no 
opportunity of employment exists. Without some such machinery, 
experience shows that insurance against unemployment breaks down, 
owing to the excessive amount of "time lost" between jobs, and the 
impossibility of securing that every claimant has done his best to get 
work. 

5.' That of all the forms of unemployment, that which we have 
termed under-employment, extending, as it does, to many hundreds 

' [This duplication of the paragraph number appears in the original. — 
Editors.] 



LABOR PROBLEMS 71 1 

of thousands of workers, and to their whole lives, is by far the worst 
in its evil effects; and that it is this system of chronic under -employ- 
ment which is above all other causes responsible for the perpetual 
manufacture of paupers that is going on; and which makes the task 
of the Distress Committees in dealing with the unemployed of other 
types — such as the men from permanent situations, or the men of 
discontinuous employment — hopelessly impracticable. 

6. That we have been unable to escape from the conclusion that, 
owing to various causes, there has accumulated, in all the ports, and 
indeed in all the large towns of the United Kingdom, an actual 
surplus of workmen, there being more than are required to do the 
work in these towns even in times of brisk trade; this surplus showing 
itself in the existence of the stagnant pools of labor that we have 
described, and in the chronic under-employment of tens of thousands 
of men at all seasons and in all years. 

7. That we have been struck by the fact that this chronic under- 
employment of men is coincident with the employment in factories 
and workshops, or on work taken out to be done at home, of a large 
number of mothers of young children who are thereby deprived of 
maternal care; with an ever-growing demand for boy- labor of an 
uneducational kind; and actually with a positive increase in the 
number of "half-timers" (children in factories below the age exempt- 
ing them from attendance at school). Thus we have, in increasing 
numbers (though whether or not in increasing proportion is not clear), 
men degenerating through enforced unemployment or chronic under- 
employment into parasitic unemployables; and the burden of indus- 
trial work cast on pregnant women, nursing mothers, and immature 
youths. 

8. That the task of dealing with unemployment is altogether 
beyond the capacity of authorities having jurisdiction over particular 
areas; and can be undertaken successfully only by a department 
of the national government. 

9. That the experience of the Poor Law in dealing with destitute 
able-bodied men and their dependents; of the Distress Committees 
in providing for laborers out of employment ; of the police in attempt- 
ing to suppress vagrancy and "sleeping out"; of the Prison Com- 
missioners in having to accommodate in gaol large numbers of men 
undergoing short sentences for offences of this nature; of the educa- 
tion and public health authorities in feeding and medically treating 
the necessitous dependents of able-bodied men; and of the voluntary 



712 MATERIALS FOR ELEMENTARY ECONOMICS 

agencies dealing with the "houseless poor" of great cities, all alike 
prove that every attempt to deal only with this or that section of 
the able-bodied and unemployed class is liable to be rendered nugatory 
by the neglect to deal simultaneously with the other sections of men 
in distress, or claiming to be in distress, from want of employment. 
That accordingly, in our judgment, no successful dealing with the 
problem is possible unless provision is simultaneously made in ways 
suited to their several needs and deserts for all the various sections 
of the unemployed by one and the same authority. 

SUMMARY OF PROPOSALS 

We therefore recommend: 

I. That the duty of so organizing the national labor market as 
to prevent or to minimize unemployment should be placed upon a 
minister responsible to Parliament, who might be designated the 
Minister for Labor. 

3. That the function of the National Labor Exchange should be, 
not only (a) to ascertain and report the surplus or shortage of labor 
of particular kinds, at particular places; and (b) to diminish the 
time and energy now spent in looking for work, and the consequent 
"leakage" between jobs; but also (c) so to "dovetail" casual and 
seasonal employments as to arrange for practical continuity of work 
for those now chronically under-employed. That while resort to 
the National Labor Exchange might be optional for employers filling 
situations of at least a month's duration, it should (following the 
precedent of the Labor Exchange for seamen already conducted by 
the Board of Trade in the mercantile marine offices) be made legally 
compulsory in certain scheduled trades in which excessive discon- 
tinuity of employment prevails; and especially for the engagement 
of casual labor. 

5. That, in order to secure proper industrial training for the 
youth of the nation, an amendment of the Factory Acts is urgently 
required to provide that no child should be employed at all below 
the age of fifteen; that no young person under eighteen should be 
employed for more than thirty hours per week; and that all young 
persons so employed should be required to attend for thirty hours 
per week at suitable trade schools to be maintained by the local 
education authorities. 



LABOR PROBLEMS 713 

7. That all mothers having the charge of young children, and in 
receipt, by themselves or their husbands, of any form of public 
assistance, should receive enough for the full maintenance of the 
family; and that it should then be made a condition of such assistance 
that the mother should devote herself to the care of her children, 
without seeking industrial employment. 

9. That in order to meet the periodically recurrent general 
depressions of trade, the government should take advantage of there 
being at these periods as much unemployment of capital as there is 
unemployment of labor; that it should definitely undertake, as far 
as practicable, the regularization of the national demand for labor; 
and that it should, for this purpose, and to the extent of at least 
£4,000,000 a year, arrange a portion of the ordinary work required 
by each department on a ten years' program; such £40,000,000 
worth of work for the decade being then put in hand, not by equal 
annual instalments, but exclusively in the lean years of the trade 
cycle; being paid for out of loans for short terms raised as they are 
required, and being executed with the best available labor, at standard 
rates, engaged in the ordinary way. 

10. That in this ten years' program there should be included 
works of afforestation, coast protection, and land reclamation ; to be 
carried out by the Board of Agriculture exclusively in the lean years 
of the trade cycle; by the most suitable labor obtainable taken on in 
the ordinary way, at the rates locally current for the work, and paid 
for out of loans raised as required. 

11. That the statistical and other evidence indicates that, by 
such measures as the above, the greater part of the fluctuations in 
the aggregate volume of employment can be obviated; and the bulk 
of the surplus labor manifesting itself in chronic under-employment 
can be immediately absorbed, leaving, at all times, only a relatively 
small residuum of men who are, for various reasons, in distress from 
want of work. 

12. That with a lessened discontinuity of employment, and the 
suppression of under-employment, the provision of out-of-work bene- 
fit by trade unions would become practicable over a much greater 
range of industry than at present; and its extension should, as the 
best form of insurance against unemployment, receive government 
encouragement and support. That in view of its probable adverse 
effect on trade-union membership and organization, we are unable 



714 MATERIALS FOR ELEMENTARY ECONOMICS 

to recommend the establishment of any plan of government or 
compulsory insurance against unemployment. That we recommend, 
however, that, following the precedents set in several foreign countries, 
a government subvention not exceeding one-half of the sum actually 
paid in the last preceding year as out-of-work benefit should be 
offered to trade-unions or other societies providing such benefit, in 
order to enable the necessary weekly contributions to be brought 
within the means of a larger proportion of the wage-earners. 

13. That for the ultimate residuum of men in distress from want 
of employment, who may be expected to remain, after the measures 
now recommended have been put in operation, we recommend that 
maintenance should be freely provided, without disfranchisement, 
on condition that they submit themselves to the physical and mental 
training that they may prove to require. That it should be the func- 
tion of the Maintenance and Training Division of the Ministry of 
Labor to establish and maintain receiving offices in the various centers 
of population, at which able-bodied men in distress could apply for 
assistance, and at which they would be medically examined and have 
their faculties tested in order to discover in what way they could be 
improved by training. They would then be assigned either to suitable 
day -training depots or residential farm colonies, where their whole 
working time would be absorbed in such varied beneficial training 
of body and mind as they proved capable of; their wives and families 
being, meanwhile, provided with adequate home aliment. 

15. That the Maintenance and Training Division should also 
establish one or more Detention Colonies, of a reformatory type, 
to which men would be committed by the magistrates, and com- 
pulsorily detained and kept to work under discipline, upon conviction 
of any such offences as vagrancy, mendicity, neglect to maintain 
family or to apply for public assistance for their maintenance if 
destitute, repeated recalcitrancy or breach of discipline in a training 
establishment, etc. 

16. That for able-bodied women, without husband or dependent 
children, who may be found in distress from want of employment, 
there should be exactly the same sort of provision as for men. That 
for widows or other mothers in distress, having the care of young 
children, residing in homes not below the national minimum of sani- 
tation, and being themselves not adjudged unworthy to have children 
entrusted to them, there should be granted adequate home aliment 



LABOR PROBLEMS 



715 



on condition of their devoting their whole time and energy to the care 
of the children. That for the childless wives of able-bodied men in 
attendance at a training establishment, adequate home aliment be 
granted, conditional on their devoting their time to such further 
training in domestic economy as may be prescribed for them. 



208. SEASONAL UNEMPLOYMENT 

Average Percentages of Unemployment at the End of Each Month, 
According to English Trade Union Figures, 1897-1906' 

^°% I \ \ \ I ^ ^ I I I ^ Shipbuilding 




Furnishing 



Carpenters and 
Joiners 



Tobacco 



Clothing 



<; c^ o ^ Q 

• The data as given in Sidney Webb's Introduction to Seasonal Trades, p. 39. 
Constable & Co., 191 2. 



7l6 MATERIALS FOR ELEMENTARY ECONOMICS 

209. LONG HOURS VERSUS EFFICIENCY' 

Perhaps the most significant study ever published on the subject 
of the relation between fatigue and the output of working-men is that 
which was set forth in two lectures before the Jena Society for Political 
Economy, in 1901, by Ernst Abbe, physicist, university professor, 
inventor of the first rank, and owner of a world-famous manufacturing 
plant — the Carl Zeiss optical works at Jena. 

When Abbe entered the Zeiss firm, in 1870, the workday had been 
twelve hours long. It was gradually reduced, reaching nine hours in 
1 89 1. Nine years later it was further shortened to eight hours, for 
the purpose of discovering, by a year's trial, the effect on output. 

Abbe was familiar with the British experiments in reducing the 
length of the workday, and had been particularly impressed by the 
experience of the Woolwich Arsenal in changing from nine to eight 
hours without loss or decrease in output. The general similarity 
and consensus of English experience on the benefits of the short day 
to output, organization, and invention seemed to Abbe presumptive 
evidence of its truth. But he realized that specific statistical proofs 
of increased efficiency under the eight-hour regime were still needed, 
and he published the careful records and statistics of the Zeiss Works 
precisely to corroborate more exactly the general principles empirically 
learned in British mills and factories. 

The effects of the change from nine to eight hours were measured 
by comparing the earnings of piece-workers during the year before 
and the year after the change. In order to make the comparison as 
accurate as possible and to eliminate chance variations, great care 
was taken to omit all workers whose output might have been affected 
by special individual causes. The comparison was limited to workers 
who had been in the firm's employ four years, and who were over 
twenty-two years old. All workers were ruled out who had lost 
more than 300 hours during the year on account of sickness or other 
reasons. About 20 others were not counted because their health 
seemed below par. This left 233 workmen whose work during the 
trial year could fairly be compared with the year before and could be 
expected to show the effect of the reduction of hours. Thanks to the 
careful system of accounting, showing for years back the daily indi- 
vidual earnings of men at piece- and time-work, the following figures 
were available. 

' From Josephine Goldmark, Fatigue and Efficiency, pp. 155-65. Survey Asso- 
ciates (publishers for the Russell Sage Foundation), 191 2. 



LABOR PROBLEMS 



717 



Comparison of Hourly Earnings of 233 Piece-Workers in the Zeiss 
Optical Works 

IN THE LAST YEAR OF THE NINE-HOUR SYSTEM (APRIL I, iSqq — APRIL I, I900) AND 
IN THE FIRST YEAR OF THE EIGHT-HOUR SYSTEM (APRIL I, IQOO — APRIL I, I901) 



Year 


Total Number Piece-Work. 
Hours 


Earnings, 
in Marks 


Earnings per 
Hour, in Pfennigs 


Ratio of 
Increase 


1899-1900. . . 
1900-1901. , . 


559,169 
Average per man 2400 

509,599 
Average per man 2187 


345,899 
366,484 


61 .9 
71.9 


100:116.2 



Now if the men, in eight hours, had earned exactly the same as 
in nine hours, piece prices remaining the same, then hourly earnings 
would have had to increase in the ratio of 8:g or 100:112.5. But" 
as a matter of fact, the hourly earnings increased in the ratio of 
100:116.2. During the trial year, therefore, wages were more than 
equal to those of the previous year. There was an increase, as shown 
above, of 3 per cent. This means that in eight hours the daily 
output was one-thirtieth more than in nine hours. In other words, 
during the trial year 30 men did the work that 31 men had done 
previously. Each man did ten days' more work during the year 
of shorter hours. 

This increase in efficiency was not confined to any one class of 
workers, nor was it particularly influenced by the ages of the workers. 
The following table shows the ages of the 233 workers under discussion, 
and how nearly uniform was their increase in efficiency in the shorter 
day. 

Increase in Efficiency Under the Eight-Hour Day of 233 Piece-Workers 

AT THE Zeiss Optical Works — Classified by Ages 
(Ages Were Reckoned from April i, 1900. Length of Service Reckoned according 
to Years Spent in the Firm's Employ after the Eighteenth Birthday) 



Ages 



No. of 
Workmen 



Average 
Ages 



Average 
Length 
Service 



Average Piece- 
Rate Earnings per 
Hour in Pfennigs 



Q-Hour 
Day 



8-Hour 
Day 



Ratio of 
Increase 



22-25. • ■ ■ 
25-30--- 
30-35 • • • • 

35-40 

Over 40 . . 

Total 



34 
69 
69 
40 



5-5 

7-9 

10. 1 

12.7 

153 



55-3 
62. 2 

65.1 
60.6 

63 -3 



65.2 
72.6 

74.8 
70.2 
74-3 



100:117.9 
100:116.7 
100: 114. 9 
100:115.8 
100: 117. 4 



233 



31.6* 9-6t 61.9 719 100:116.2 



♦Maximum 53, minimum 22 years. 



t Maximum 33, minimum 4 years. 



7i8 



MATERIALS FOR ELEMENTARY ECONOMICS 



A second classification divides the 233 workers in question accord- 
ing to their special kinds of work. It shows that the efficiency of all 
increased in about the same proportion, though the work ranged from 
the most delicate and highly skilled technical processes to the ordinary 
operations of wood-turning, polishing, etc. 

The most interesting fact that emerges from this table is that 
the largest increase in efficiency occurred in the coarser kinds of work. 
Groups 4, 7, and 11, which comprise almost entirely machine workers, 
showed the greatest improvement. Only one small group of 20 
workers, highly skilled hand grinders, did not produce or earn as 
much in eight hours as in nine. They failed by 3 per cent. 

Increase in Efficiency of the 233 Workers — Classified by Occupation 



OCCXJPATION 



< 



Earnings 
PER Hour 

IN Pfennigs 



9-Hour 
Day 



8-Hour 
Day 



Ratio of 

Increase 



Optical Operations: 

1. Lens-setters: Fine hand- 

work 

2. Microscope grinders, etc. . . . 

3. Other hand grinders and cen- 

terers, entirely handwork 

4. Machine grinders, entirely 

machine work 

Mechanical and Auxiliary Work: 

5. Adjusting rooms, entirely 

handwork 

6. Mounting rooms, chiefly 

handwork 

7. Turning and milling, entirely 

machine work 

8. Polishers and lacquerers, en- 

tirely handwork 

9. Engraving, entirely hand- 

work 

10. Molders, entirely handwork. 

11. Carpenters, part hand, part 

machine 

12. Case makers, chiefly hand- 

work 



21 
20 

59 
19 



20 

23 

17 

5 
6 

IS 

6 



311 
33-2 

26. 1 

32.1 

31-7 
36.9 
35-2 

34-7 

27. 2 
36.2 

35-2 

30-4 



12.7 
13.8 

7-5 
5-8 

8.2 

II. 6 

II . I 

II . 2 

6.8 
9-7 

10.5 
6.4 



72.8 
79.1 

60.4 

52.2 



233 



31.6 



9.6 



61 



84.9 
86.5 

70-5 
62.0 



71 



100:116.6 
100:109.4 

100: 116. 7 



100:117. I 

100:117.9 

100:118.1 

100:117.7 

100:119.3 
100:114.9 

100: 120.3 

100:112.7 



100:116. 2 



One more table of figures, and we can turn to the argument which 
Abbe based upon his statistics. He sought for corroboration of the 
astonishing fact that eight hours' work not only equalled but exceeded 
nine hours' work, and he found it in a perfectly objective standard of 



LABOR PROBLEMS 719 

measurement; that is, the amount of power used during the four 
weeks before and four weeks after the introduction of the eight-hour 
day. 

The 650 different machines in the Zeiss Works were driven by 
one central dynamo (not connected with the lighting). The amount 
of power used was determined by hourly readings of a wattmeter. 
In regard to the expenditure of power, Abbe makes a distinction 
between the actual amount used, when it is transmitted and the 
machines are in operation, and the so-called "waste" of power, 
when the plant is "running dead," as it is called; that is, when 
power is turned on and available but the machines are not in use — as 
just before work begins, etc. 

The wattmeter readings showed that during the last four weeks 
of the nine-hour system, the average amount of power transmitted 
per hour was 49 . 2 kilowatts. By a special contrivance it was shown 
that during this time, the hourly "waste of power" (the plant "run- 
ning dead") was about half the total use, that is, 26 k. w. Thus the 
actual amount of power used averaged 23.2 k. w. per hour. After 
the eight-hour day was introduced the amount of power transmitted 
rose from 49. 2 k. w. to 52 k. w. per hour. The actual amount used 
rose from 23.2 k. w. to 26.0 k. w. per hour; that is, in the ratio of 
100:112. This shows that eight hours' work just equalled the 
previous nine hours' work, since, as we have seen before, for our 
mathematical basis, 8:9=110:112.5. 

But in effect, in many of the operations, the output not only 
equalled but exceeded that of the previous nine-hour regime; and 
the wattmeter readings proved this also. For the majority of the 
machines in the works (three-fourths of them) were not wholly 
automatic. They were machines which the workers used like tools, 
using more or less power according to their intensity of application, 
by shortening pauses between operations, pressing more or less heavily 
in grinding and polishing, and in similar ways. 

Hence the increased amount of power used in the eight-hour 
day, as shown by the hourly readings, was to be ascribed not to all 
the machines, but to three-quarters of the machines only. The 
ratio of increase for these, where the men regulated the amount of 
power used, was larger than the given figure of 100 : 1 1 2 which included 
all the machines. For three-quarters of the machines, the ratio of 
increase was higher; that is, as 100:116. In other words, they 
exceeded in eight hours by 3 per cent the output of the nine-hour 



720 MATERIALS FOR ELEMENTARY ECONOMICS 

day, confirming the conclusion previously proved by the earnings 
of the piece-workers. 

Such being the evidence of cold statistics, the man of science in 
Abbe began to search for the causes. He examined the external 
conditions of work during the trial year and the year before. They 
had not markedly varied. The demand for Zeiss products and the 
consequent pressure at the works had been the same. There had been 
no extremes of heat or cold in the seasons, which, as he found, some- 
times affect the output of highly skilled mechanics. In fact, the 
workers had for the most part been unconscious of their increased 
intensity of work. Many would not believe that they had produced 
more in eight hours than in nine until shown the proof. The figures 
showing the weekly amount of power used confirmed what Abbe 
learned direct from the men. Some had begun to work with feverish 
intensity when the new day was introduced, but had given it up in 
disgust after the first week, finding the effort exhausting. During 
the second week the output of these workers had consequently 
fallen below the nine-hour day; but by the third or fourth week 
they had recovered their normal pace, and, unknown to themselves, 
were equalling and surpassing the work of the longer day. 

Abbe concluded that the adaptation of the worker to the shorter 
day, his intensity of application, was largely automatic, and did not 
depend primarily on his good or ill will. This was proved also by the 
firm's previous experience with overtime. Under the nine-hour 
regime, the men had been required to work one hour overtime at 
seasons of pressure. But it had been found that their efficiency did 
not keep up for any length of time. It fell off in about two weeks, 
in spite of the men's evident desire to earn the 25 per cent higher 
wages of overtime. One November Abbe himself had tried the experi- 
ment, when the men were eager to earn more just before Christmas. 
But the result was the same. The output of overtime deteriorated 
in one week, and by the third or fourth week it was practically nil. 

Just where each man's maximum lies, when he can accomplish 
most in the shortest time without injury to himself. Abbe thought 
essentially a matter of special investigation. But he concluded, from 
his own extended observations and from the experience of others in 
Germany and England, that for about three-fourths of the industrial 
workers of Germany nine hours was too long a day in which to reach 
their maximum and eight hours not too short to reach it. He there- 
fore recommended a program still commonly held radical — the gradual 



LABOR PROBLEMS 721 

reduction of the workday not to nine but to eight hours for German 
industries, in the interests of economic development and of greater 
national efficiency. 

210. THE SWEATING SYSTEM' 

In contrast with the growth of large establishments, which is so 
conspicuous a feature of recent economic development, it must be 
observed that in certain industries the small shop retains its hold. 
One phase of this remarkable exception to the general trend of indus- 
trial organization is found in the so-called sweating system in the 
manufacture of clothing, where, in certain divisions of the trade, the 
larger establishments have been driven out of business by smaller 
establishments. This supremacy of the smaller establishments is 
closely connected with the fact that in them are found the worst 
conditions of labor — low wages, long hours, and oppressive methods 
of payment. 

The sweating system in the clothing trade, from the standpoint 
of organization of industry, consists in the separation of the manu- 
facturing from the marketing of the product. The wholesale clothing 
manufacturer is really a wholesale merchant, and the manufacturing 
proper is conducted by independent contractors in their own small 
establishments. While in certain lines of clothing there is a tendency 
toward the growth of large merchandising, owing to the greater 
economies in managing and sustaining a staff of salesmen and in the 
larger purchases of cloth, yet on the manufacturer's side there is an 
advantage in the small establishment. One reason why the small 
establishment survives is the wide variety of garments manufactured. 
Ready-made clothing is now produced in factories for men, women, 
and children, of all styles and grades. Hence there is an economy 
if each establishment specializes on certain lines; and it is usually 
the case that one contractor devotes his entire attention to a certain 
grade of coats, another to a certain grade of vests, and so on. The 
facts, too, that the business depends on the season, that the capital 
invested must lie idle during several months of the year, and that 
the factory must usually be located in a large city, where rents are 
very high, make it to the advantage of the merchant to throw the 
expenses of these items upon the contractor. Such articles as overalls, 

' From the Final Report (Vol. XIX) of the Industrial Commission (1902), 
pp. 740-42. 



722 MATERIALS FOR ELEMENTARY ECONOMICS 

army clothing, and cheaper garments can be made on a large scale in 
successful competition with the smaller shops, but the smaller shops 
hold their own in the greater portion of clothing manufacture. 

The principal reason, however, for the existence of the small 
shop is the oversupply of cheap labor, brought about through immi- 
gration, and the pressure of this class of laborers to find employment 
under whatever conditions may be imposed. This class of labor can 
best be secured through the personal interest of a contractor rather 
than that of a foreman. The contractor lives in the neighborhood 
of the immigrants, is familiar with their languages, and is able to 
secure them in times of business activity. His solicitations are more 
personal than those of large employers. 

On account of these conditions, the manufacturers, instead of 
employing foremen to supervise the manufacture of their garments, 
give their work out to contractors. The contractors, requiring but 
little capital, spring up in large numbers, and their competition with 
one another drives the contract price to the lowest possible limit. 
Being on intimate terms with their employees, and in many cases 
even less prosperous than the better grade of workmen, they act as 
go-betweens, and when the merchant's price for a garment is lowered, 
they can persuade their workmen to take a reduction in pay or to 
agree to work longer hours. In this way a continual higgling is con- 
ducted; and since in the absence of strong labor organization no 
established scale of wages and no regular hours of labor exist, there 
is no protection for the contractor or the sweat-shop worker. 

Originally the sweating system was a system of working at home, 
whither the tailor with his family and a few helpers carried the goods 
which they were to prepare for the merchant. The homework or 
tenement-house work of former years has largely disappeared, espe- 
cially for the manufacture of ready-made garments, owing particularly 
to legislation directed against it in the years following the influx of 
immigrants fifteen years and more ago. At the same time, also, the 
progress of the industry has demonstrated the greater economy of 
separate shops, where a larger number can be employed upon the 
same garment, with a more minute division of labor. These small 
shops have taken the place of the tenements in the manufacture of 
the bulk of ready-made clothing. Many of them are in the rear of 
tenements and sometimes in portions of tenements, though not in 
the living rooms. There is, however, one remnant of the original 
homework which still largely clings to the tenement, namely, the 



LABOR PROBLEMS 723 

so-called "finishing" on coats and trousers, and also certain kinds 
of light work by which the women of the house earn "pin money." 
While the greater portion of the work on ready-made clothing has 
been taken out of the tenement house, yet, since the "finishing" of 
the garments is still largely done at home, it is evident that, as far 
as contagious and infectious diseases are concerned, tenement-house 
work is fully as dangerous to the public as it was in earlier days. 

211. THE ECONOMIC THEORY OF A LEGAL MINIMUM 

WAGE' 

We must first get clearly before us the distinction between the 
fixing and enforcing of a Minimum, and the fixing and enforcing of a 
wage. What is here in question (as in all factory legislation) is a 
Minimum, not a Maximum — still less any actual decision that the 
wage shall be such or such sum. There is no sort of resemblance or 
analogy between prescribing that the work-people shall under no 
circumstances get more than a specified rate, and merely enacting that 
they shall under no circumstances get less. The whole economic and 
social consequences and results of the two types of legislation, and 
their effects on employers and on industry, are as different as chalk 
is from cheese. 

The principal question for the economist to consider is how the 
adoption and enforcement of a definite minimum of wages in particular 
trades is likely to affect, both immediately and in the long run, the 
productivity of those trades, and of the nation's industry as a whole. 

Now upon this point the verdict of economic theory, whatever 
it may be worth, is, I submit, emphatic and clear. To the modern 
economist there seems nothing in the device of a legal minimum of 
wages, especially where (as would in the great majority of trades be the 
case) it takes the form of a Standard Piecework List, that is in any 
way calculated to diminish productivity. On the contrary, all expe- 
rience, as well as all theory, seems to show that, as compared with no 
regulation of wages, or with leaving the employer free to deal indi- 
vidually with each operative, it must tend actually to increase the 
productivity of the industry. Every employer naturally prefers to be 
free to do whatever he chooses; to compete in any way he pleases, on 

' Adapted from Sidney Webb, "The Economic Theory of a Legal Minimum 
Wage," in Tlie Journal of Political Economy, XX, 976-96 (December, 191 2). 

[For estimates of the reasonable minimum of living expenses see Selection 9, 
on "A Normal Standard of Living." — Editors.] 



724 MATERIALS FOR ELEMENTARY ECONOMICS 

the downward way as well as on the upward way. But the enforce- 
ment in any industry, whether by law or by public opinion, or by 
strong Trade Unionism, of a Standard Rate, a Normal Day and pre- 
scribed conditions of sanitation and safety, does not prevent the 
employer's choice of one man rather than another, or forbid him to 
pick, out of the crowd of applicants, the strongest, the most skilful, 
or the best conducted workman. The universal enforcement of a 
Legal Minimum Wage in no way abolishes competition for employ- 
ment. It does not even limit the intensity of such competition, or 
the freedom of the employer to take advantage of it. All that it 
does is to transfer the pressure from one element in the bargain to the 
other — from the wage to the work, from price to quality. If the con- 
ditions of employment are unregulated, it will frequently "pay" an 
employer (though it does not pay the community for him to do so) 
not to select the best workman, but to give the preference to an incompe- 
tent or infirm man, a "boozer" or a person of bad character, provided 
that he can hire him at a sufficiently low wage, make him work exces- 
sive and irregular hours, or subject him to insanitary or dangerous 
conditions. In short, the employer may (in the absence of definitely 
fixed minimum conditions) make more profit, though less product, 
out of inefficient workmen than out of good workmen. With a 
Legal Minimum Wage, and with similarly fixed hours and sanitary 
conditions, this frequent lowering of productivity is prevented. If 
the employer cannot go below a common minimum rate, and is unable 
to grade the other conditions of employment down to the level of the 
lowest and most necessitous wage earner in his establishment, he is 
economically impelled to do his utmost to raise the level of efficiency 
of his workers, so as to get the best possible return for the fixed con- 
ditions. Thus, a Legal Minimum Wage positively increases the pro- 
ductivity of the nation's industry, by insuring that the surplus of un- 
employed workmen shall be exclusively the least efficient workmen; 
or to put it in another way, by insuring that all the situations shall 
be filled by the most efficient operatives who are available. This 
is plainly not the case under "free competition" where there is no 
fixed minimum. 

But the enforcement of a Legal Minimum Wage does more than 
act as a perpetual stimulus to the selection of the fittest men for 
employment. The fact that the employer's mind — no longer able 
to seek profit by "nibbling" at wages — is constantly intent on getting 
the best possible workmen, silently and imperceptibly reacts on the 



LABOR PROBLEMS 725 

wage earners. The young workman, knowing that he cannot secure 
a preference for employment by offering to put up with worse condi- 
tions than the standard, seeks to commend himself by a good character, 
technical skill, and general intelligence. Under a Legal Minimum 
Wage there is secured what under perfectly free competition is not 
secured, not only a constant selection of the most efficient but also a 
positive stimulus to the whole class to become more and more efficient. 
It is unnecessary here to dwell on the enormous moral advantage of 
such a permanently acting, all-pervasive influence on character. But 
this, too, has an economic value in increasing productivity. 

So far we have considered merely the effect upon productivity 
of enforcing a Minimum Wage, quite irrespective of this involving a 
positive increase of wages. But to enforce a minimum is actually to 
raise the wages of, at any rate, some of the worst paid operatives. 
We have, therefore, to consider also the efifect on the living human 
being of the more adequate wages that the enforcement of a legal 
minimum would involve in the lowest grades. If unrestricted indi- 
vidual competition among the wage earners resulted in the universal 
prevalence of a high standard of physical and mental activity, it would 
be difficult to argue that a mere improvement of sanitation, a mere 
shortening of the hours of labor, or a mere increase in the amount of 
food and clothing obtained by the workers or their families, would 
of itself increase their industrial efficiency. But such ideal conditions 
are far from prevailing in any country. In the United Kingdom at 
least eight millions of the population — over one million of them, as Mr. 
Charles Booth tells us, in London alone — are at the present time 
existing under conditions represented by family earnings of less than 
five dollars a week. It is notorious that even in the United States 
there are millions of families unable to earn regularly throughout the 
whole year as much as ten dollars a week, a sum which does not 
afford, at present prices, in the slums of New York or Chicago, Pitts- 
burgh or Cincinnati, enough for a physiologically healthy exist- 
ence. The unskilled, and especially the casually hired laborer, who 
is inadequately fed, whose clothing is scanty and inappropriate to 
the season, who lives with his wife and children in a single room in a 
slum tenement, and whose spirit is broken by the ever-recurring 
irregularity of employment, cannot by any incentive be stimulated 
to much greater intensity of effort, for the simple reason that his 
method of life makes him incapable of either the physical or mental 
energy that would be involved. 



726 MATERIALS FOR ELEMENTARY ECONOMICS 

But we have got into the habit of thinking that the productivity 
of industry depends more upon the efficiency of the brains and ma- 
chinery employed, than upon the quality of the manual laborers. Let 
us, therefore, consider the probable effects of a Legal Minimum Wage 
upon the brain- workers, including under this term all who are con- 
cerned in the direction of industry. Here the actual experience of the 
Factory Acts and of strong Trade Unionism is very instructive. 
When all the employers in a trade find themselves precluded, by the 
existence of a Common Rule, from worsening the conditions of 
employment — when, for instance, they are legally prohibited from 
crowding more operatives into their mills or keeping them at work for 
longer hours, or, when they find it impossible, owing to a strictly 
enforced piecework list, to nibble at wages — they are driven in their 
competitive struggle with each other, to seek advantage in other 
ways. We arrive, therefore, at the unexpected result that the 
enforcement of definite minimum conditions of employment as com- 
pared with a state of absolute freedom to the employer to do as he 
likes, positively stimulates the invention and adoption of new processes 
of manufacture. 

But this is not all. Besides its direct effect in stimulating all the 
employers, the mere existence of a Legal Minimum Wage has another 
and an even more important result on the efiiciency of industry, in 
that it tends steadily to drive business into those establishments which 
are' most favorably situated, best equipped, and managed with the 
greatest ability, and to eliminate the incompetent or old-fashioned 
employer. The result is a constant tendency for the whole industry 
to be carried on under the most advantageous conditions. This, of 
course, from the standpoint of the economist concerned for the utmost 
possible productivity, is all to the good. 

Thus, the probable effect of a Legal Minimum Wage on the 
organization of industry, like its effect on the manual laborer and the 
brain-working manager or entrepreneur, is all in the direction of in- 
creasing efficiency. Its effect on the personal character of the opera- 
tive is in the right direction. It in no way aboHshes competition, 
or lessens its intensity. What it does is perpetually to stimulate the 
selection, for the nation's business, of the most efficient workmen, the 
best-equipped employers, and the most advantageous forms of 
industry. It in no way deteriorates any of the factors of production ; 
on the contrary, its influence acts as a constant incentive to the 
further improvement of the manual laborers, the machinery, and the 



LABOR PROBLEMS 727 

organizing ability used in industry. In short, whether with regard 
to labor or capital, invention or organizing ability, the mere existence 
of a Legal Minimum Wage in any industry promotes alike the selec- 
tion of the most efficient factors of production, their progressive 
functional adaptation to a higher level, and their combination in the 
most advanced type of industrial organization. 

What would be the result of a Legal Minimum Wage on the 
employer's persistent desire to use boy labor, girl labor, married 
women's labor, the labor of old men, of the feeble-minded, of the 
decrepit and broken-down invalids, and all the other alternatives to 
the engagement of competent male adult workers at a full Standard 
Rate ? What would be the effect, in short, upon the present employ- 
ment, at wages far below a decent level, of workers who at present 
cannot (or at any rate do not) obtain a full subsistence wage ? 

To put it shortly, all such labor is parasitic on other classes of the 
community, and is at present employed in this way only because it is 
parasitic. 

When an employer, without imparting any adequate instruction 
in a skilled craft, gets his work done by boys and girls who live with 
their parents and work practically for pocket money, he is clearly 
receiving a subsidy or bounty, which gives his process an economic 
advantage over those worked by fully paid labor. But this is not all. 
Even if he pays the boys or girls a wage sufficient to cover the cost 
of their food, clothing, and lodging so long as they are in their teens, 
and dismisses them as soon as they become adults, he is in the same 
case. For the cost of boys and girls to the community includes not 
only their daily bread between thirteen and twenty-one, but also 
their nurture from birth to the age of beginning work, and their 
maintenance as adult citizens and parents. If a trade is carried on 
entirely by the labor of boys and girls, and is supplied with successive 
relays who are dismissed as soon as they become adults, the mere 
fact that the employers pay what seems a subsistence wage to the 
young people does not prevent the trade from being economically 
parasitic. The employer of adult women is in the same case, where, 
as is usual, he pays them a wage insufficient to keep them in full 
efficiency, irrespective of what they receive from their parents, hus- 
bands, or lovers. In all these instances the efficiency of the services 
rendered by young persons or women is being kept up out of the 
earnings of some other class. These trades are therefore as clearly 
receiving a subsidy as if the workers in them were being given a 



728 MATERIALS FOR ELEMENTARY ECONOMICS 

"rate in aid of wages." The employer of partially subsidized 
woman or child labor gains actually a double advantage over the 
self-supporting trades: he gets, without cost to himself, the extra 
energy due to the extra food for which his wages do not pay, and he 
abstracts — possibly from the workers at a rival process, or in a com- 
peting industry — some of the income which might have increased the 
energy put into the other trade. 

But there is a far more vicious form of parasitism than this partial 
maintenance by another class. The continued efficiency of a nation's 
industry obviously depends on the continuance of its citizens in 
health and strength. For an industry to be economically self-support- 
ing, it must, therefore, maintain its full establishment of workers, 
unimpaired in numbers and vigor, with a sufficient number of children 
to fill all vacancies caused by death or superannuation. If the 
employers in a particular trade are able to take such advantage of 
the necessities of their workpeople as to hire them for wages actually 
insufficient to provide enough food, clothing, and shelter to maintain 
them permanently in average health; if they are able to work them 
for hours so long as to deprive them of adequate rest and recreation; 
or if they can subject them to conditions so dangerous or insanitary 
as positively to shorten their lives, that trade is clearly obtaining a 
supply of labor force which it does not pay for. If the workers thus 
used up were horses— as, for instance, on the horse-cars of an old 
street railroad, or Hke those that the English stagecoaches formerly 
"used up" in three years' galloping — the employers would have to 
provide, in addition to the daily modicum of food, shelter, and rest, 
the whole cost of breeding and training the successive relays necessary 
to keep up their establishments. In the case of free human beings, 
who are not purchased by the employer, this capital value of the new 
generation of workers is placed gratuitously at his disposal, on pay- 
ment merely of subsistence from day to day. Such parasitic trades 
are not drawing any money subsidy from the incomes of other classes. 
But in thus deteriorating the physique, intelligence, and character of 
their operatives, they are drawing on the capital stock of the nation. 
And even if the using up is not actually so rapid as to prevent the 
"sweated" workers from producing a new generation to replace them, 
the trade is none the less parasitic. In persistently deteriorating the 
stock it employs, it is subtly draining away the vital energy of the 
community. It is taking from these workers, week by week, more 
than its wages can restore to them. A whole community might con- 



LABOR PROBLEMS 729 

ceivably thus become parasitic on itself, or, rather upon its future. 
If we imagine all the employers in all the industries of the nation to be, 
in this sense, "sweating" their labor, the entire nation would, genera- 
tion by generation, steadily degrade in character and industrial 
efficiency. 

It is to prevent this result that every civilized nation has been 
driven, by a whole century of experiment, to the adoption of stringent 
factory legislation as regards sanitation and hours of labor. But 
just as it is against public policy to allow an employer to engage a 
woman to work excessive hours or under insanitary conditions, so it 
is equally against public policy to permit him to engage her for wages 
insufficient to provide the food and shelter without which she cannot 
continue in health. Once we begin to prescribe the minimum con- 
ditions under which an employer should be permitted to open a fac- 
tory, there is no logical distinction to be drawn between the several 
clauses of the wage-contract. From the point of view of the employer, 
one way of increasing his expenses is the same as another, while to the 
economist and the statesman, concerned with the permanent efficiency 
of industry and the maintenance of national health, adequate food 
is at least as important as reasonable hours or good drainage. To 
be completely effectual the same policy will, therefore, have to be 
applied to wages. Thus, to the economist, the enforcement of a 
Legal Minimum Wage appears but as the latest of the long series of 
Common Rules, which experience has proved to be (a) necessary 
to prevent national degradation; and (b) positively advantageous to 
industrial efficiency. 

Does this mean that the enforcement of a Legal Minimum Wage 
in any sweated industry will involve the destruction of that industry ? 
By no means. 

When any particular way of carrying on an industry is favored 
by a bounty or subsidy, this way will almost certainly be chosen, to 
the exclusion of other methods of conducting the business. If the sub- 
sidy is withdrawn, it often happens that the industry falls back on 
another process, which, less immediately profitable to the capitalists 
than the bounty-fed method, proves positively more advantageous 
to the industry in the long run. This result, familiar to the Free 
Trader, is even more probable when the bounty or subsidy takes the 
form, not of a protective tariff, an exemption from taxation, or a 
direct money grant, but of the privilege of exacting from the manual 
workers more labor-force than is replaced by the wages and other 



730 MATERIALS FOR ELEMENTARY ECONOMICS 

conditions of employment. The low wages to which, in the unregu- 
lated trades, the stream of competitive pressure forces employers and 
operatives alike, are not in themselves, any more economically ad- 
vantageous to the industry, than the long hours and the absence of 
sanitary precautions were to the early cotton mills of Lancashire. 
If the employers paid more, the labor would be worth more. In so 
far as this proves to be the case, the legal minimum wage would have 
raised the Standard of Life without loss of trade, without cost to the 
employer, and without disadvantage to the community. 

The question then arises what effect the prohibition of parasitism 
would have on the individuals at present working in the sweated 
trades. We need not dwell on the individual personal hardships 
incidental to any shifting of industry or change of process. Any 
deliberate improvement in the distribution of the nation's industry 
ought, out of regard for these hardships, to be brought about gradually, 
and with equitable consideration of the persons injuriously affected. 
But there is no need to assume that anything like all those now 
receiving less than the Legal Minimum Wage would be displaced by 
its enactment. 

We see, in the first place, that the very leveling up of the standard 
conditions of sanitation, hours, and wages would, in some directions, 
positively increase the demand for labor. The contraction of the 
employment of boys and girls, brought about by the needful raising of 
the age for full and half-time, respectively, would, in itself, increase 
the number of situations to be filled by adults. The enforcement 
of the normal day, by stopping the excessive hours of labor now worked 
by the most necessitous operatives, and the overtime resorted to 
whenever it suits the momentary convenience of each particular 
employer — quite irrespective of whether the community as a whole is 
in a hurry or not — would automatically absorb the best of the 
unemployed workers in their own and allied occupations, and would 
create a new demand for learners. Finally, the abandonment of that 
irregularity of employment which so disastrously affects the New York 
outworkers and the London dock-laborers, and indeed most other 
occupations, would result in the enrolment of a new permanent staff. 
All these changes would bring into regular work, at or above the 
Legal Minimum, whole classes of operatives, selected from among 
those now only partially or fitfully employed. Thus, all the most 
capable and best conducted would certainly obtain regular situations. 
But this concentration of employment would, it must be admitted. 



LABOR PROBLEMS 731 

imply the total exclusion of others, who might, in the absence of 
regulation, have "picked" up some sort of partial livelihood. In so 
far as the persons thus rendered permanently unemployed consisted 
merely of children removed from industrial work to the schoolroom, 
few (and certainly no economist) would doubt that the change would 
be wholly advantageous to natural productivity and economic 
efficiency. And there are many who would welcome a reorganization 
of industry, which, by concentrating employment exclusively among 
those in regular attendance, would tend automatically to exclude 
from wage-labor, and to set free for domestic duties, an ever-increas- 
ing proportion of the women having young children to attend to. 
There would still remain to be considered the remnant, who', notwith- 
standing the increased demand for adult male labor and independent 
female labor, proved to be incapable of earning the Legal Minimum 
in any capacity whatsoever. We should, in fact, be brought face to 
face with the problem, not of the unemployed but of the unemploy- 
able; those whom no employer would employ at the Legal Minimum 
even if trade was booming and he could get nobody else. 

The unemployable, to put it bluntly, do not and cannot under any 
circumstances earn their keep. What we have to do with them is to 
see that as few as possible of them are produced; that such of them 
as can be cured are (almost at whatever cost) treated so as promptly 
to remove their incapacity, and that the remnant are provided 
for at the public expense, as wisely, humanely, and inexpensively 
as possible. 

There remains the question for the economist of the manner in 
which a Legal Minimum Wage can be best determined and enforced. 
The object being to secure the community against the evils of indus- 
trial parasitism, the minimum wage for a man or a woman respectively 
ought, theoretically, to be determined by practical inquiry as to the cost 
of the food, clothing, and shelter physiologically necessary, according 
to national habit and custom, to prevent bodily and mental deteriora- 
tions. Such a minimum would, therefore, be low, and though its 
establishment would be welcomed as a boon by the unskilled workers in 
the unregulated trades, it would not at all correspond with the con- 
ception of a "living wage" formed by the cotton operatives or the 
coal miners. Practically, in all but the lowest paid trades, chiefly 
for women workers, it must in practice be left to the wage earners 
to settle the Standard Rate and other conditions of employment 
by Collective Bargaining. 



732 MATERIALS FOR ELEMENTARY ECONOMICS 

To those not practically acquainted with the organization of 
industry and Government administration in countries of advanced 
development the idea of a compulsorily enforced Minimum Wage 
may seem impracticable. Of course, there will still be people up and 
down the country who will go on saying that it is " impossible " — while 
it is in actual operation, not only in Australia, and New Zealand, and 
the United Kingdom, but under their own eyes! As a matter of 
fact, the authoritative settlement of a minimum wage is already under- 
taken daily. Every municipal authority throughout the country has 
to decide, under the criticism of public opinion, what wage it will 
pay to its lowest grade of laborers. It can hire them at any price, 
even at twenty-five cents a day; but it must be rare that any such 
genuinely ''competitive" wage is paid. What happens in practice 
is that the officer in charge fixes such a wage as he believes he can 
permanently get good enough work for. In the same way, the 
National Government of the United Kingdom, which is by far the 
largest employer of labor in the country, does not take the cheapest 
laborers it can get, at the lowest price at which they will offer them- 
selves, but deliberately settles its own minimum wage for each depart- 
ment. What is not so generally recognized is that exactly the same 
change is taking place in private enterprise. The great captains 
of industry, interested in the permanent efficiency of their establish- 
ments, have long adopted the practice of deliberately fixing the 
minimum wage to be paid to the lowest class of unskilled laborers, 
according to their own view of what the laborers can live on, instead 
of letting out their work to subcontractors, whose only object is to 
exact the utmost exertion for the lowest price. A railroad never 
dreams of putting its situations up to tender, and engaging the man 
who offers to come at the lowest wage; what happens is that the rate 
of pay of trainmen and roadmen is deliberately fixed in advance. 
The assumption that the wages of the lowest grade of labor must, 
at any rate, be enough to maintain the laborer in industrial efficiency 
is, in fact, accepted by all parties, so that the task of an arbitrator in 
such a case is comparatively easy. Indeed, the fixing of a minimum 
wage on physiological grounds is a less complicated matter, and one 
demanding less technological knowledge, than the fixing of a mini- 
mum of sanitation, which is done in every Factory Law; and it 
interferes far less with the day-by-day management of industry or its 
productivity, than any fixing of the maximum hours of labor, 
whether of men or women. As a matter of fact, what would happen 



LABOR PROBLEMS 733 

would be the adoption, as the Legal Minimum, of the wage actually 
paid by the better establishments, which would be affected only to the 
extent of finding their competitors put on the same level as them- 
selves. 

On all counts, therefore, the modern economist must conclude 
that the enforcement, throughout each particular trade, of a Legal 
Minimum of Wages would, like the analogous enforcement of Com- 
mon Rules as to hours and sanitation by the Factory Law, be cal- 
culated to have good, and not bad, economic results on the community 
as a whole. 

212. THE MINNESOTA MINIMUM WAGE LAW OF 1913' 

AN ACT TO ESTABLISH A MINIMUM WAGE COMMISSION, AND TO PROVIDE 

FOR THE DETERMINATION AND ESTABLISHMENT OF MINIMUM 

WAGES FOR WOMEN AND MINORS 

Be it enacted by the Legislature of the Stale of Minnesota: 

Section i. There is hereby established a commission to be 
known as the minimum wage commission. It shall consist of three 
persons, one of whom shall be the commissioner of labor who shall 
be the chairman of the commission, the governor shall appoint two 
others, one of whom shall be an employer of women, and the third 
shall be a woman, who shall act as secretary of the commission. The 
first appointment shall be made within sixty days after the passage 
of this act for a term ending January i, 191 5. Beginning with the 
year 191 5 the appointments shall be for two years from the first day 
of January and until their successors qualify. Any vacancy that may 
occur shall be filled in like manner for the unexpired portion of the 
term. 

Sec. 2. The commission may at its discretion investigate the 
wages paid to women and minors in any occupation in the state. At 
the request of not less than one hundred persons engaged in any occu- 
pation in which women and minors are employed, the commission 
shall forthwith make such investigation as herein provided. 

Sec. 3. Every employer of women and minors shall keep a 
register of the names and addresses of and wages paid to all women 
and minors employed by him, together with number of hours that 
they are employed per day or per week; and every such employer 
shall on request permit the commission or any of its members or agents 
to inspect such register. 

' Chap. 547, General Laws of Minnesota, 1913. 



734 MATERIALS FOR ELEMENTARY ECONOMICS 

Sec. 4. The commission shall specify times to hold public hear- 
ings at which employers, employees, or other interested persons may 
appear and give testimony as to wages, profits and other pertinent 
conditions of the occupation or industry. The commission or any 
member thereof shall have power to subpoena witnesses, to admin- 
ister oaths, and to compel the production of books, papers, and other 
evidence. Witnesses subpoenaed by the commission may be allowed 
such compensation for travel and attendance as the commission may 
deem reasonable, to an amount not exceeding the usual mileage and 
per diem allowed by our courts in civil cases. 

Sec. 5. If after investigation of any occupation the commission 
is of opinion that the wages paid to one-sixth or more of the women 
or minors employed therein are less than living wages, the commission 
shall forthwith proceed to establish legal minimum rates of wages 
for said occupations, as hereinafter described and provided. 

Sec. 6. The commission shall determine the minimum wages 
sufficient for living wages for women and minors of ordinary ability, 
and also the minimum wages sufficient for living wages for learners 
and apprentices. The commission shall then issue an order, to be 
effective thirty days thereafter, making the wages thus determined 
the minimum wages in said occupation throughout the state, or 
within any area of the state if differences in the cost of living warrant 
this restriction. A copy of said order shall be mailed, so far as practi- 
cable, to each employer affected; and each such employer shall be 
required to post such a reasonable number of copies as the commission 
may determine in each building or other work place in which affected 
workers are employed. The original order shall be filed with the 
commissioner of labor. 

Sec. 7. The commission may at its discretion establish in any 
occupation an advisory board which shall serve without pay, consist- 
ing of not less than three nor more than ten persons representing the 
employers, and an equal number of persons representing the 
workers in said occupation, and of one or more disinterested persons 
appointed by the commission to represent the public; but the number 
of representatives of the public shall not exceed the number of repre- 
sentatives of either of the other parties. At least one-fifth of the 
membership of any advisory board shall be composed of women, 
and at least one of the representatives of the public shall be a woman. 
The commission shall make rules and regulations governing the 
selection of members and the modes of procedure of the advisory 



LABOR PROBLEMS 735 

boards, and shall exercise exclusive jurisdiction over all questions 
arising with reference to the validity of the procedure and determina- 
tion of said boards. Provided: that the selection of members repre- 
senting employers and employees shall be, so far as practicable, through 
election by employers and employees respectively. 

Sec. 8. Each advisory board shall have the same power as the 
commission to subpoena witnesses, administer oaths and compel 
the production of books, papers, and other evidence. Witnesses 
subpoenaed by an advisory board shall be allowed the same compensa- 
tion as when subpoenaed by the commission. Each advisory board 
shall recommend to the commission an estimate of the minimum wages 
whether by time rate or by piece rate, sufficient for living wages for 
women and minors of ordinary ability, and an estimate of the mini- 
mum wages sufficient for living wages for learners and apprentices. A 
majority of the entire membership of an advisory board shall be neces- 
sary and sufficient to recommend wage estimates to the commission. 

Sec. 9. Upon receipt of such estimates of wages from an advisory 
board, the commission shall review the same, and if it approves them 
shall make them the minimum wages in said occupation, as provided 
in section 6. Such wages shall be regarded as determined by the 
commission itself and the order of the commission putting them into 
effect shall have the same force and authority as though the wages 
were determined without the assistance of an advisory board. 

Sec. id. All rates of wages ordered by the commission shall 
remain in force until new rates are determined and established by the 
commission. At the request of approximately one-fourth of the 
employers or employees in an occupation, the commission must recon- 
sider the rates already established therein and may, if it sees fit, order 
new rates of minimum wages for said occupation. The commission 
may likewise reconsider old rates and order new minimum rates on its 
own initiative. 

Sec. II. For any occupation in which a minimum time rate of 
wages only has been ordered the commission may issue to a woman 
physically defective a special license authorizing her employment at 
a wage less than the general minimum ordered in said occupation: 
and the commission may fix a special wage for such person. Provided : 
that the number of such persons shall not exceed one-tenth of the 
whole number of workers in any establishment. 

Sec. 12. Every employer in any occupation is hereby prohibited 
from employing any worker at less than the living wage or minimum 



736 MATERIALS FOR ELEMENTARY ECONOMICS 

wage as defined in this act and determined in an order of the commis- 
sion: and it shall be unlawful for any employer to employ any worker 
at less than said living or minimum wage. 

Sec. 13. It shall likewise be unlawful for any employer to dis- 
charge or in any manner discriminate against any employee because 
such employee has testified, or is about to testify, or because such 
employer believes that said employee is about to testify, in any investi- 
gation or proceeding relative to the enforcement of this act. 

Sec. 14. Any worker who receives less than the minimum wage 
ordered by the commission shall be entitled to recover in civil action 
the full amount due as measured by said order of the commission, 
together with costs and attorney's fees to be fixed by the court, not- 
withstanding any agreement to work for a lesser wage. 

Sec. 15. The commission shall enforce the provisions of this 
act, and determine all questions arising thereunder, except as other- 
wise herein provided. 

Sec. 16. The commission shall biennially make a report of its 
work to the governor and the state legislature, and such reports shall 
be printed and distributed as in the case of other executive documents. 

Sec. 17. The members of the commission shall be reimbursed 
for traveling and other necessary expenses incurred in the performance 
of their duties on the commission. The woman member shall receive 
a salary of eighteen hundred dollars annually for her work as secretary. 
All claims of the commission for expenses necessarily incurred in the 
administration of this act, but not exceeding the annual appropriation 
hereinafter provided, shall be presented to the state auditor for pay- 
ment by warrant upon the state treasurer. 

Sec. 18. There is appropriated out of any money in the state, 
treasury not otherwise appropriated for the fiscal year ending July 31 
1914, the sum of five thousand dollars ($5,000.00), and for the fiscal 
year ending July 31, 1 9 1 5 , the sum of five thousand dollars ($5 ,000 . 00) . 

Sec. 19. Any employer violating any of the provisions of this 
act shall be deemed guilty of a misdemeanor and upon conviction 
thereof shall be punished for each offense by a fine of not less than ten 
nor more than fifty dollars or by imprisonment for not less than ten 
nor more than sixty days. 

Sec. 20. Throughout this act the following words and phrases 
as used herein shall be considered to have the following meanings 
respectively, unless the context clearly indicates a different meaning 
in the connection used: 



LABOR PROBLEMS 737 

(i) The terms "living wage" or "living wages" shall mean wages 
sufficient to maintain the worker in health and supply him with the 
necessary comforts and conditions of reasonable life; and where the 
words "minimum wage" or "minimum wages" are used in this act, 
the same shall be deemed to have the same meaning as "living wage" 
or "living wages." 

(2) The terms "rate" or "rates" shall mean rate or rates of wages. 

(3) The term "commission" shall mean the minimum wage com- 
mission. 

(4) The term "woman" shall mean a person of the female sex 
eighteen years of age or over. 

(5) The term "minor" shall mean a male person under the age 
of twenty-one years, or a female person under the age of eighteen 
years. 

(6) The terms "learner" and "apprentice" may mean either a 
woman or a minor, 

(7) The terms "worker" or "employee" may mean a woman, a 
minor, a learner, or an apprentice, who is employed for wages. 

(8) The term "occupation" shall mean any business, industry, 
trade, or branch of a trade in which women or minors are employed. 

Sec. 20. This act shall take effect and be in force from and after 
its passage. 

Approved April 26, 1913. 

213. MACHINERY AND THE QUALITY OF LABOR' 

In considering the influence of machinery upon the quality of 
labor — i.e., skill, duration, intensity, intellectuality, etc., we have first 
to face two questions — What are the qualities in which machinery 
surpasses human labor? What are the kinds of work in which 
machinery displaces man ? Now, since the whole of industrial work 
consists in moving matter, the advantage of machinery must consist 
in the production and disposition of motive power. The general 
economies of machinery are — (i) The increased quantity of motive 
force it can apply to industry; (2) greater exactitude in the regular 
appUcation of motive force (a) in time — the exact repetition of the 

■ Adapted from J. A. Hobson, The Evolution of Modern Capitalism, chap, ix 
(original edition). Walter Scott Publishing Co. 

[On the relation of machinery to immigrant labor see Selection 39. See also 
Selection 199: "The Attitude of the Typographical Union Toward Machinery." — 
Editors.] 



738 MATERIALS FOR ELEMENTARY ECONOMICS 

same acts at regulated intervals, or greater evenness in continuity, (b) 
in place — exact repetition of the same movements in space. All the 
advantages imputed to machinery in the economy of human time, the 
utilization of waste material, the display of concentrated force or the 
delicacy of manipulation are derivable from these two general 
economies. Hence it follows that wherever the efficiency of labor 
power depends chiefly upon the output of muscular force in motive 
power, or precision in the regulation of muscular force, machinery will 
tend to displace human labor. Assuming, therefore, that displaced 
labor finds other employment, it will be transferred to work where 
machinery has not the same advantage over human labor — that is to 
say, to work where the muscular strain or the need for regularity of 
movement is less. At first sight it will thus seem to follow that every 
displacement of labor by machinery will bring an elevation in the 
quality of labor, that is, will increase the proportion of labor in 
employments which tax the muscles less and are less monotonous. 
This is in the main the conclusion toward which Professor Marshall 
inclines.* 

So far as each several industry is concerned, it has been shown 
that the introduction of machinery signifies a net reduction of employ- 
ment, unless the development of trade is largely extended by the fall 
of price due to the diminution in expenses of production. It cannot 
be assumed as a matter of course that the labor displaced by the 
introduction of automatic folders in printing will be employed in less 
automatic work connected with printing. It may be diverted from 
muscular monotony in printing to the less muscular monotony of 
providing some new species of luxury, the demand for which is not yet 
sufficiently large or regular to justify the application of labor-saving 
machinery. But even assuming that the whole or a large part of the 
displaced labor is engaged in work which is proved to have been less 
muscular or less automatic by the fact that it is not yet undertaken 
by machinery, it does not necessarily follow that there is a diminution 
in the aggregate of physical energy given out, or in the total 
"monotony" of labor. 

One direct result of the application of an increased proportion of 
labor power to the kinds of work which are less "muscular" and less 
"automatic" in character will be a tendency toward greater division 
of labor and more specialization in these employments. Now the 
economic advantages of increased specialization can only be obtained 

' Principles of Economics, 2d ed., pp. 314, 322. 



LABOR PROBLEMS 739 

by increased automatic action. Thus the routine or automatic 
character, which constituted the monotony of the work in which 
machinery displaced these workers, will now be imparted to the 
higher grades of labor in which they are employed, and these in their 
turn will be advanced toward a condition which will render them open 
to a new invasion of machinery. 

Since the number of productive processes falling under machinery 
is thus continually increased, it will be seen that we are not entitled 
to assume that every displacement of labor by machinery will increase 
the proportion of labor engaged in lighter and more interesting forms 
of non-mechanical labor. 

Nor is it shown that the growth of machine-production tends to 
diminish the total physical strain upon the worker, though it greatly 
lessens the output of purely muscular activity. As regards those 
workers who pass from ordinary manual work to the tending of 
machinery, there is a good deal of evidence to show that, in the typical 
machine industries, their new work taxes their physical vigor quite as 
severely as the old work. Professor Shield Nicholson quotes the 
following striking statement from the Cotton Factory Times: 

It is quite a common occurrence to hear young men who are on the best 
side of thirty years of age declare they are so worked up with the long mules, 
coarse counts, quick speeds, and inferior material, that they are fit for 
nothing at night, only going to bed and taking as much rest as circumstances 
will allow. There are few people who will credit such statements; never- 
theless they are true, and can be verified any day in the great majority of 
the mills in the spinning districts. 

Schulze-Gaevernitz shows that the tendency in modern cotton- 
spinning and weaving, especially in England, has been both to increase 
the number of spindles and looms which an operative is called upon to 
tend, and to increase the speed of spinning. "A worker tends today 
more than twice or nearly three times as much machinery as his 
father did; the number of machines in use has increased more than 
five-fold since that time, while the workers have not quite doubled 
their numbers."^ With regard to speed, "since the beginning of the 
seventies the speed of the spinning machines alone has increased 
about 15 per cent."^ 

We are not, however, at liberty to infer from Schulze-Gaevernitz's 
statement regarding the increased number of spindles and looms an 
operative tends, that an intensification of labor correspondent with 

^ Der Grossbetrieb, p. 120. "Ibid, p. 117. 



740 MATERIALS FOR ELEMENTARY ECONOMICS 

this increase of machinery has taken place, nor can the increased 
output per operative be imputed chiefly to improved skill or energy 
of the operative. Much of the labor-saving character of recent 
improvements, especially in the carding, spinning, and intermediate 
processes, has reduced to an automatic state work which formerly 
taxed the energy of the operative, who has thereby been enabled to 
tend more machinery and to quicken the speed without a net increase 
of working energy. The general opinion seems to be that in the 
spinning mills, roughly speaking, 75 per cent of the increased output 
per operative may be imputed to improved machinery, 25 per cent to 
increased intensity of labor in regard to quantity of spindles or 
"speeding up." 

Summing up the evidence, we are able to conclude that the short- 
ening of working hours and the improvements in machinery have 
been attended by an increased effort per unit of labor time. In the 
words of an expert, 

the change to those actually engaged in practical work is to lessen the 
amount of hard manual work of one class, but to increase their responsi- 
bility, owing to being placed in charge of more machinery, and that of a 
more expensive kind; while the work of the more lowly skilled will be 
intensified, owing to increased production, and that from an inferior raw 
material. I mean that to the operative the improvements in machinery 
have been neutralized by the inferior quality of raw material used, and 1 
think it is fair to assume that their work has been intensified at least in 
proportion to the increase of spindles, etc. 

The direct evidence drawn from this most highly evolved machine 
industry seems to justify the general opinion expressed by Professor 
Nicholson, "It is clear that the use of machines, though apparently 
labor-saving, often leads to an increase in the quantity of labor, nega- 
tively, by not developing the mind, positively, by doing harm to 
the body.'" 

When any muscular or other physical effort is required it is pretty 
evident that an increased duration or a greater continuity in the 
slighter effort may tax the body quite as severely as the less frequent 
or constant application of a much greater bodily force. There can be 
no question but that in a competitive industrial society there exists a 

' Babbage, in laying stress on one of the "advantages" of machinery, makes an 
ingenuous admission of this "forcing" power. "One of the most singular advan- 
tages we derive from machinery is the check it affords against the inattention, the 
idleness, or the knavery of human agents." — Economy of Machinery, p. 39; cf. also 
Ure, Philosophy of Manufactures, p. 30. 



LABOR PROBLEMS 741 

tendency to compensate for any saving of hard muscular or other 
physical effort afforded by the intervention of machinery in two ways: 
first, by "forcing the pace" — i.e., compelling the worker to attend 
more machines or to work more rapidly, thus increasing the strain, if 
not upon the muscles, then upon the nerves; secondly, by extending 
the hours of labor. A lighter form of labor spread over an increased 
period of time, or an increased number of minor muscular exertions 
substituted for a smaller number of heavier exertions within the same 
period of time, may of course amount to an increased tax upon the 
vital energy. It is not disputed that a general result of the factory 
system has been to increase the average length of the working day, if 
we take under our survey the whole area of machine-production in 
modern industrial communities. This is only in part attributable to 
the fact that workers can be induced to sell the same daily output of 
physical energy as before, while in many cases a longer time is required 
for its expenditure. Another influence of equal potency is the 
economy of machinery effected by working longer hours. It is the 
combined operation of these two forces that has lengthened the aver- 
age working day. Certain subsidiary influences, however, also 
deserve notice, especially the introduction of cheap illuminants. 
Before the cheap provision of gas, the working time was generally 
limited by daylight. Not until the first decade of this century was 
gas introduced into cotton-mills, and another generation elapsed 
before it passed in general use in manufactories and retail shops.' 
Now a portion of nature's rest has been annexed to the working day. 
There are, of course, powerful social forces making for a curtailment 
of the working day, and these forces are in many industries powerfully 
though indirectly aided by machinery. Perhaps it would be right to 
say that machinery develops two antagonistic tendencies as regards 
the length of the working day. Its most direct economic influence 
favors an extension of the working hours, for machinery untired, 
wasting power by idleness, favors continuous work. But when the 
growing pace and complexity of highly organized machinery taxes 
human energy with increasing severity, and compresses an increased 
human effort within a given time, a certain net advantage in limiting 
the working day for an individual begins to emerge, and it becomes 
increasingly advantageous to work the machinery for shorter hours, 
or, where possible, to apply "shifts" of workers.^ 

' Porter, Progress of the Nation, p. 590. 
' Cf. Schulze-Gaevernitz, p. 115. 



742 MATERIALS FOR ELEMENTARY ECONOMICS 

But in the present stage of machine-development the economy of 
the shorter working day is only obtainable in a few trades and in a 
few countries; the general tendency is still in the direction of an 
extended working day. The full significance of this is not confined 
to the fact that a larger proportion of the worker's time is consumed 
in the growing monotony of production. The curtailment of his time 
for consumption, and a consequent lessening of the subjective value 
of his consumables must be set off against such increase in real wages 
or purchasing power as may have come to him from the increased 
productive power of machinery. The value of a shorter working day 
consists not merely in the diminution of the burden of toil it brings, 
but also in the fact that increased consumption time enables the 
workers to get a fuller use of his purchased consumables, and to enjoy 
various kinds of "free wealth" from which he was precluded under a 
longer working day.' So far as machinery has converted handi- 
craftsmen into machine-tenders, it is extremely doubtful whether it 
has lessened the strain upon their energies, though we should hesitate 
to give an explicit indorsement to Mill's somewhat rhetorical verdict. 
"It is questionable if all the mechanical inventions yet made have 
lightened the day's toil of any human being." At any rate we have 
as yet no security that machinery, owned by individuals who do not 
themselves tend it, shall not be used in such a way as to increase the 
physical strain of those who do tend it. • 

There is a temptation [as Mr. Cunningham says] to treat the machine 
as the main element in production, and to make it the measure of what a 
man ought to do, instead of regarding the man as the first consideration, and 
the machine as the instrument which helps him; the machine may be made 
the primary consideration, and the man may be treated as a mere slave 
who tends it.^ 

Now to come to the question of " monotony." Is the net tendency 
of machinery to make labor more monotonous or less, to educate the 
worker or to brutalize him ? Does labor become more intellectual 
under the machine? Professor Marshall, who has thoughtfully 
discussed this question, inclines in favor of machinery. It takes away 
manual skill, but it substitutes higher or more intellectual forms of 
skill.3 "The more delicate the machine's power the greater is the 
judgment and carefulness which is called for from those who see after 

' Cf. Patten, The Theory of Dynamic Economics, chap, xi, 

' Uses and Abuses of Money, p. iii. ^ Principles, p. 315. 



LABOR PROBLEMS 743 

it."^ Since machinery is daily becoming more and more delicate, it 
would follow that the tending of machinery would become more and 
more intellectual. The judgment of Mr. Cooke Taylor, in the 
conclusion of his admirable work, The Modern Factory System, is the 
same. " If man were merely an intellectual animal, even only a moral 
and intellectual one, it could scarcely be denied, it seems to us, that 
the results of the factory system have been thus far elevating." Mr. 
Taylor indeed admits of the operative population that "they have 
deteriorated artistically; but art is a matter of faculty, of perception, 
of aptitude, rather than of intellect." This strange severance of art 
from intellect and morals, especially when we bear in mind that life 
itself is the finest and most valuable of arts, will scarcely commend 
itself to deeper students of economic movements. 

The growth of machinery has acted as an enormous stimulus to 
the study of natural laws. A larger and larger proportion of human 
effort is absorbed in processes of invention, in the manipulation of 
commerce on an increasing scale of magnitude and complexity, and 
in such management of machinery and men as requires and educates 
high intellectual faculties of observation, judgment, and speculative 
imagination. Of that portion of workers who may be said, within 
limits, to control machinery, there can be no question that the total 
effect of machinery has been highly educative. The growing size, 
power, speed, complexity of machinery undoubtedly makes the work 
of this class of workers "more intellectual." Some measure of these 
educative influences even extends to the "hand" who tends some 
minute portion of the machinery, so far as the proper performance of 
his task requires him to understand other processes than those to 
which his labor is directly and exclusively applied. 

Though the quahty and intelligence and skill applied to the 
invention, application, and management of machinery is constantly 
increasing, practical authorities are almost unanimous in admitting 
that the proportion which this skilled work bears to the aggregate of 
labor in machine industry is constantly diminishing. Now, setting 
on one side this small proportion of intelligent labor, what are we to 
say of the labor of him who, under the minute subdivision enforced by 
machinery, is obliged to spend his working Hfe in tending some small 
portion of a single machine, the whole result of which is continually to 
push some single commodity a single step along the journey from raw 
material to consumptive goods ? 

^ Ibid., p. 316. 



744 MATERIALS FOR ELEMENTARY ECONOMICS 

The factory is organized with military precision, the individual's 
work is definitely fixed for him ; he has nothing to say as to the plan 
of his work or its final completion or its ultimate use. "The constant 
employment on one sixty-fourth part of a shoe not only offers no 
encouragement to mental activity, but dulls by its monotony the 
brains of the employee to such an extent that the power to think and 
reason is almost lost."^ 

The work of a machine-tender, it is urged, calls for "judgment and 
carefulness." So did his manual labor before the machine took it 
over. His "judgment and carefulness" are now confined within 
narrower limits than before. The responsibility of the worker is 
greater, precisely because his work is narrowed down so as to be related 
to and dependent on a number of other operatives in other parts of 
the same machine with whom he has no direct personal concern. 
Such realized responsibility is an element in education, moral and 
intellectual. But this gain is the direct result of the minute sub- 
division, and must therefore be regarded as purchased by a narrowing 
of interest and a growing monotony of work. The ordinary machine- 
tender, save in a very few instances, e.g., watchmaking, has no general 
understanding of the work of a whole department. Present conditions 
do not enable the "tender" to get out of machinery the educational 
influence he might get. 

Generally speaking [says Dr. Arlidge], it may be asserted of machinery 
that it calls for little or no brain exertion on the part of those connected 
with its operations; it arouses no interest, and has nothing in it to quicken 
or brighten the intelligence, though it may sharpen the sight and stimulate 
muscular activity in some one limited direction.^ 

The work of machine-tending is never of course absolutely 
automatic or without spontaneity and skill. To a certain Hmited 
extent the "tender" of machinery rules as well as serves the machine; 
in seeing that his portion of the machine works in accurate adjustment 
to the rest, the qualities of care, judgment, and responsibility are 
evolved. For a customary skill of wrist and eye, which speedily 
hardens into an instinct, is often substituted a series of adjustments 
requiring accurate quantitative measurement and conscious reference 
to exact standards. In such industries as those of watchmaking the 
factory worker, though upon the average his work requires less manual 
dexterity than the handworker in the older method, may get more 

' D. A. Wells, Contemporary Review, 1889, p. 392. 
' Diseases of Occupations, pp. 25, 62. 



LABOR PROBLEMS 745 

intellectual exercise in the course of his work. But though economists 
have paid much attention to this industry, in considering the character 
of machine-tending it is not an average example for a comparison of 
machine labor and hand labor; for the extreme delicacy of many ot 
the operations, even under machinery, the responsibility attaching to 
the manipulation of expensive material, and the minute adjustment 
of the numerous small parts, enable the worker in a watch factory to 
get more interest and more mental training out of his work than falls 
to the ordinary worker in a textile or metal factory. Wherever the 
material is of a very delicate nature and the processes involve some 
close study of the individual qualities of each piece of material, as is 
the case with the more valuable metals, with some forms of pottery, 
with silk or lace, elements of thought and skill survive and may even 
be fostered under machine industry. A great part of modern invent- 
iveness, however, is engaged in devising automatic checks and 
indicators for the sake of dispensing with detailed human skill and 
reducing the spontaneous or thoughtful elements of tending machinery 
to a minimum. When this minimum is reached the highly paid 
skilled workman gives place to the low-skilled woman or child, and 
eventually the process passes over entirely into the hands of 
machinery. 

A locomotive superintendent of a railway was recently questioned 
as to the quality of engine-driving. "After twenty years' experience 
he declared emphatically that the very best engine-drivers were those 
who were most mechanical and unintelligent in their work, who cared 
least about the internal mechanism of the engine."^ Yet engine- 
driving is far less mechanical and monotonous than ordinary tending 
of machinery. 

So far as the man follows the machine and has his work determined 
for him by mechanical necessity, the educative pressure of the latter 
force must be predominant. Machinery, like everything else, can 
only teach what it practices. Order, exactitude, persistence, con- 
formity to unbending law — these are the lessons which must emanate 
from the machine. They have an important place as elements in the 
formation of intellectual and moral character. But of themselves 
they contribute a one-sided and very imperfect education . Machinery 
can exactly rejiroduce; it can, therefore, teach the lesson of exact 
reproduction, an education of quantitative measurements. The 
defect of machinery, from the educative point of view, is its absolute 

' The Social Horizon, p. 22. 



746 MATERIALS FOR ELEJVIENTARY ECONOMICS 

conservatism. The law of machinery is a law of statical order, that 
everything conforms to a pattern, that present actions precisely 
resemble past and future actions. Now the law of human life is 
dynamic, requiring order not as valuable in itself, but as the condition 
of progress. The law of human life is that no experience, no thought, 
or feeling is an exact copy of any other. Therefore, if you confine a 
man to expending his energy in trying to conform exactly to the 
movements of a machine, you teach him to abrogate the very principle 
of life. Variety is of the essence of life, and machinery is the enemy 
of variety. This is no argument against the educative uses of 
machinery, but only against the exaggeration of these uses. If a 
workman' expend a reasonable portion of his energy in following the 
movements of a machine, he may gain a considerable educational 
value; but he must also have both time and energy left to cultivate 
the spontaneous and progressive arts of life. 

It is often urged that the tendency of machinery is not merely to 
render monotonous the activity of the individual worker, but to reduce 
the individual differences in workers. This criticism finds expression 
in the saying: ''All men are equal before the machine." So far as 
machinery actually shifts upon natural forces work which otherwise 
would tax the muscular energy, it undoubtedly tends to put upon a 
level workers of different muscular capacity. Moreover, by taking 
over work which requires great precision of movement, there is a sense 
in which it is true that machinery tends to reduce the workers to a 
common level of skill, or even of unskill. 

Whenever a process requires peculiar dexterity and steadiness of hand, 
it is withdrawn as soon as possible from the cunning workman, who is prone 
to irregularities of many kinds, and it is placed in charge of a peculiar 
mechanism, so self-regulating that a child can superintend it.' 

That this is not true of the most highly skilled or qualitative work 
must be conceded, but it applies with great force to the bulk of lower 
skilled labor. 

But this is by no means all that is signified by the "equality of 
workers before the machine." It is the adaptability of the machine 
to the weaker muscles and intelligence of women and children that is 
perhaps the most important factor. The machine in its development 
tends to give less and less prominence to muscle and high individual 
skill in the mass of workers, more and more to certain qualities of 

' Ure, Philosophy of Manufactures, chap, i, p. 19. 



LABOR PROBLEMS 747 

body and mind which not only differ less widely in different men, but 
in which women and children are more nearly on a level with men. 
The tendency of machine industry to displace male by female labor is 
beyond all question. Legal restrictions, and in the more civilized 
communities, the growth of a healthy public opinion, prevent the 
economic force from being operative to the same degree so far as 
children are concerned. 

The net influence of machinery upon the quality of labor, then, is 
found to differ widely according to the relation which subsists between 
the worker and the machine. Its educative influence, intellectual 
and moral, upon those concerned with the invention, management, and 
direction of machine industry, and upon all whose work is about 
machinery, but who are not detailed machine-tenders, is of a dis- 
tinctly elevating character. Its effect, however, upon machine- 
tenders in cases where, by the duration of the working day or the 
intensity of the physical effort, it exhausts the productive energy of 
the worker, is to depress vitality and lower him in the scale of human- 
ity by an excessive habit of conformity to the automatic movements 
of a non-human motor. This human injury is not adequately 
compensated by the education in routine and regularity which it 
confers, or by the slight understanding of the large co-operative 
purposes and methods of machine industry which his position enables 
him to acquire. 

214. EMPLOYERS' LIABILITY' 
I. employers' liability in the united states' 

a) The law. — The status of the law of employers' liability in 
the United States will be discussed briefly, first, in its relation to the 
common law, then, in regard to legislative enactments, and finally 
respecting the practical results of its application. 

The common-law principles here involved fall under three heads — 
the law of negUgence, the doctrine of assumed risks, and the fellow- 
servant doctrine. 

' Adapted from G. L. Campbell, Industrial Accident Compensation, chaps, iv 
and vi. Houghton Mifflin Co., iqii. 

^ No effort has been made to present an exhaustive study of the subject. A 
very full statement of the common-law principles and judicial interpretations, 
together with the text of statutory enactments in the American states, may be 
found in Bulletin of the United States Bureau of Labor, No. 74 (January, 1908). 



748 MATERIALS FOR ELEMENTARY ECONOMICS 

It has long been recognized in the common law that he whose 
negligence has led to the injury of a fellow-man may be held finan- 
cially responsible for damages. This, in brief, is the law of neghgence. 
Linked closely to it is the principle of respondeat superior, which was 
first laid down in 1697 in the case of Tuberville vs. Stampe. The 
court asserted that he who chooses the convenience of delegating to 
others the performance of his personal and business services is as 
responsible for injuries brought about in doing them as if he were 
himself the direct agent. In other words, the master must answer 
for the negligence of the servant. Shortly after this, in the case 
of Thomas vs. Quartermaine, the principle of contributory negligence 
was enunciated. If the plaintiff, it was averred, had so contributed 
to the causes of the accident that the breach of duty on the part of 
the defendant was not its proximate cause, then he, the plaintiff, had 
no ground for action. 

The law of negligence is general in its provisions — no distinction 
is made, up to this point, between those who are servants of the 
negligent party and those who are not. The servant is the fellow- 
man of the master, and reasonable precaution against injury is due 
him. But, in the last two maxims of the common law relating to 
employers' liability — the doctrine of assumed risks and the fellow- 
servant doctrine — important distinctions are set up between those 
who are employees and those who are not, and the accountability 
of the master for injuries befalling his servants is limited accordingly. 

The doctrine of assumed risk was the first of these maxims to be 
declared. He who knowingly places himself in danger of personal 
injury by accepting hazardous employment, assumes, therewith, 
the risk of injury. No one is in a better position to know the danger- 
ous character of his work, says this dogma, than the workman him- 
self. He can therefore demand wages commensurate with the risk 
involved. If, for any reason, the danger in his particular position 
is greater than might ordinarily be expected, his legal duty is to give 
up his employment or to obtain a promise from the employer to make 
right the abnormal situation. A free citizen, says this legal theory, 
may work under danger or not, just as he chooses. If he chooses 
to do so, then he has assumed the risk of injury. 

Of these common-law principles, of which two have been discussed, 
the most noteworthy, curiously enough, did not appear until 1837. 
In that year the fellow-servant doctrine, a broad amplification of 
the doctrine of assumed risk, was laid down in deciding the case of 



LABOR PROBLEMS 749 

Priestley vs. Fowler. It asserts that danger of injury through the 
negligence of another servant of the same master is a known, common, 
and ever-present risk of working in company with others, and that 
consequently — in accordance with the doctrine of assumed risk — a 
worker so injured has no ground for action against his employer. 

These principles of the common law, together with statutory 
changes and judicial interpretations, form our existing law of employ- 
ers' liability. The law of negUgence and the doctrine of assumed 
risk had already been transplanted bodily from England into the 
United States when our law entered upon its independent develop- 
ment. Although the fellow-servant doctrine was not enunciated in 
England until long afterward, it soon found recognition in American 
courts — in the case of Murray vs. South Carolina Railway Company, 
decided in 1841 in South Carolina, and in Farwell vs. Boston and 
Worcester Railroad Company, decided in 1842 in Massachusetts. In 
deciding the latter case the court said: "These are perils which the 
servant is as Ukely to know, and against which he can as effectually 
guard, as the master. They are perils incident to the service, and 
which can be as distinctly foreseen and pro\dded for in the rate of 
compensation as any others." 

In almost all the states and territories, modifications and exten- 
sions of these common-law doctrines have been made by legislative 
enactment. A general analysis of these statutory provisions will show 
the wide variation of the obligations imposed by employers' liability 
laws in different states. 

Statutory changes have been made in all but six of the states and 
territories, but in only sixteen of these states are the enactments appli- 
cable to all servants. In twelve others the laws apply only to railroad 
employees; in five, to railroad and mine workers, and in one to mine 
workers only. In addition to these, two commonwealths have 
made laws applicable only to injuries befalling employees of corpora- 
tions; one, laws applicable only to factory workers; three, laws 
applicable only to factory and railroad employees; and another, 
laws applicable to all "industrial employees." In nine of the states 
having laws that apply to all servants, the particular hazard of employ- 
ment on railroads and in mines has been recognized by the inclusion 
of provisions that bear specifically on cases in which men are injured 
in one or both of these industries. 

In but nine states does legislation specifically hold all employers 
responsible for defects in ways, works, machinery, or plant that may 



750 MATERIALS FOR ELEMENTARY ECONOMICS 

lead to the injury of employees. In five others such legislation 
applies to railroad companies only. Nineteen states make provisions 
for stated safety devices and precautions in factories, on railroads, 
and in mines, and stipulate that employers be held responsible for 
injuries arising from non-compliance. 

In a majority of the states the law, in so far as it is applicable, 
makes the employer specifically liable for negligence in superintend- 
ence — that is, the negligence of an employee having powers of the 
master delegated to him. In but four states is the fellow-servant 
doctrine abolished for employees in all industries. In thirteen it is 
abolished for railroad employees only, in three for both railroad 
and mining employees, and in one, for mine workers only. In ten 
states other than these the doctrine is greatly modified. In all, 
thirty-two states have enactments of some character relating to 
this doctrine. 

A means much used at one time to evade obligations imposed by 
employers' liability laws was to require workers, as a condition of 
employment, to sign papers releasing the employer from any claims 
that might be made under the provision of such laws. This is known 
as "contracting out." Twenty-one states expressly provide that, 
in so far as their liability laws apply, attempts to "contract out" 
shall be void. Some of the states even attach penalties to the mere 
act of making such an attempt. In four other states such contracts 
are barred between railroads and their employees, and one state 
makes the same prohibition in relation to the mining industry. 

b) Objections to the law: — Although the common law affecting the 
liability of the employer for accidents be||illing his men has, as thus 
shown, been greatly modified by statuwy^ enactments in many 
states, the judge-made laws concerning ri'^gligence, assumed risks, 
and the fellow-servant are still dominant. If the social and industrial 
conditions under which these principles were first promulgated were 
not greatly different from the conditions under which productive enter- 
prises are conducted at the present time, the need for studying the 
problem of compensation for accidents would be less apparent. But 
the tremendous expansion of systems of production that has marked 
the development of modern industrialism has had two important 
results — increased danger to the worker, and lessened personal 
contact with fellow-workers and with employers. Modern creative 
processes have brought multitudes of workers into direct contact 
with ponderous implements of production that render their occupa- 



LABOR PROBLEMS 7SI 

tions extremely dangerous, and have also made expedient, if not 
necessary, complicated relations between owners, managers, superin- 
tendents, foremen, and employees. In these modern industrial 
organizations the common worker may be far removed from fellow- 
employees and employer, and thus his individual importance and 
responsibility is often reduced to a minimum. 

Of this extraordinary change in a society which it is intended to s^^ 

serve, the law of employers' liability has failed to take cognizance. 

In its absurd respect for precedent, the law assumes the conditions of 
a bygone age. The burden of injury, says the law of negligence, 
must be borne by the individual responsible for it; yet the majority 
of accidents today are chargeable to conditions, not to men. The 
danger of injury, says the doctrine of assumed risks, may be better 
known and provided against by the employee than by the employer; 
but, in a time of supervision by technical men and of untrained labor, 
the reverse is more often true. A habitually negligent man, says the 
fellow-servant doctrine, may be detected by his fellow-workers more 
readily than by his employer, and, as a consequence, they are better 

situated to guard against his careless acts. But this too is a doctrine^ 

of the past. In an age when the negUgent fellow-servant may be ' 
a telegraph operator whom the railroad trainman never saw, or a 
hoisting engineer who speaks a different language from that of the 
foreign-born miner whose life depends upon his reliability, the utter 
absurdity of this contention is made fully evident. 

More than this, there are no outgrown principles, such as the 
doctrine of assumed risk and the fellow-servant doctrine, that may 
be brought to the aid of the injured worker. The employer alone 
may profit from the application of archaic legal dogmas, for the 
common law of employers' liability was apparently developed under 
a philosophy of social expediency that protected the man of property 
against the claims of the irresponsible plebeian. Whatever may 
have been the defense of such a poHcy at a time when capital was 
limited and the conditions of industry more simple, its projection 
into the life of the present is indefensible. 

Even if we grant the comfortable fiction that the law arbitrates 
impartially in liability cases, the great difference in the ease with 
which employer and employee may follow its intricate processes 
has seriously handicapped the latter. The principal obstacles are 
the uncertainty, the expense, and the delay of litigation — all of which 
fall most heavily upon the plaintiff. A large employer may, in the 



752 MATERIALS FOR ELEMENTARY ECONOMICS 

knowledge that his average of losses is low, accept serenely an adverse 
decision. There is no law of averages to console the injured employee 
or his dependents. The loss of his suit at law, like the loss of his 
earning power, is a blow that falls but once. The employee is usually 
obliged to engage his attorney upon the basis of a contingent fee, 
and therefore secures less expert service than does the employer in 
return for the sum expended. Court fees are often difficult for the 
plaintiff to pay, and, as each step in the long proceedings calls for 
additional expenditure, the temptation grows greater and greater to 
settle for a small sum, or to abandon the unequal contest. The slow 
processes of the law work no hardship upon the defendant employer, 
but for the injured worker or his dependents it is often a starving-out 
process, effective in forcing an inequitable settlement. The law, in 
short, has so many technicalities, its defenses for the employer are so 
strong, and its processes are so slow, that worthy claimants with httle 
means have but a meager chance of just consideration. 

The common law of liability, an outgrowth of the past, is no 
longer in harmony with the social organism it aims to serve, while 
statutory modifications in many states have been inadequate to 
remedy its deficiencies. Says Elihu Root, "The present law is 
fooHsh, wasteful, ineffective, and barbarous." Its absurd protection 
of property rights at the expense of human interests must lead, 
sooner or later, to its radical modification, if not to its complete 
overthrow. 

II. A PROGRAM OF REFORM 

The study of the situation at home and abroad suggests a pro- 
gram for reform, and its ultimate accomplishment should be held 
constantly in view. 

a) Employers should be held accountable for the safety of surroundings 
and equipment. This is now recognized in Great Britain, and in 
most of the states of Continental Europe. In nine American states 
this principle is applied to all industries; in five others, to railways; 
and in nineteen more, responsibihty is thrown upon employers who 
fail to comply with legal requirements concerning stated safety 
devices and precautions. Its general acceptance in the United 
States would largely abolish the doctrine of assumed risk, and greatly 
reduce Htigation. 

b) Employers should be held accountable for the negligent acts of 
their employees. This principle also is accepted in most of the coun- 
tries of Europe and in three American states. In ten others it is 



LABOR PROBLEMS 753 

recognized in part, and in eighteen more it applies to specified indus- 
tries. Its general acceptance would abolish the fellow-servant 
doctrine and restore the principle of respondeat superior to the full 
range of legal appHcation that it should properly have. 

c) The employer's defense of contributory negligence should be 
denied. The workingman's environment makes constant care 
impossible, and this general defense against liability works grave 
injustice. Industry should bear its inevitable accident losses, as 
it bears its inevitable fire losses and maintenance charges. No 
part of the burden should be thrown upon those whose earning 
power is sacrificed. In most European nations only such contribu- 
tory negligence as is wilful, unreasonable, or unlawful bars the victim 
from the right to compensation, and recognition of the same principle 
should be an early reform in American legislation. 

d) Employers should be held accountable for unpreventable accidents. 
In spite of all possible precaution, many workingmen are sure to 
be killed and injured. Neither employers nor employees are at 
fault in such cases, but since such accidents seem necessary in the 
creation of economic goods, the burden should be placed, through 
the employer, upon the ultimate consumer of the finished product. 
This principle is fully recognized in Europe, and is faintly suggested 
by a recent law in Montana. Its general acceptance in the United 
States together with the recognition of the first and second principles 
outlined, would completely abolish the doctrine of assumed risk. 

e) Employers should bear the burden of proof. By the English 
Act of 1897 it is made the part of the employer to show that the law 
is not appUcable to the case in question, and the same principle has 
been partially accepted on the Continent. Two American states 
throw the burden of proof on the employer in railroad cases. The 
victim of the accident is invariably the weaker party to the contro- 
versy, and the general acceptance of this principle would make 
workingmen more secure in the rights conferred by other reforms. 

/) Compensations should be paid according to a definite scale fixed by 
law and varying according to the age and pecuniary situation of dependents. 
The principle of fixed compensation was recognized by the English 
Act of 1897; it has spread to the British colonies, and the definite 
but variable scale of payments and pensions is a meritorious feature 
of the compensation laws of the states on the Continent. In America 
a few states set maximum limits to the liability of employers on account 
of any one casualty, but that is all. One of the most flagrant abuses 



754 MATERIALS FOR ELEMENTARY ECONOMICS 

under the existing system of law is the spirit of speculation that 
is fostered by the ever dazzling possibility of a large award. The 
establishment of a definitely variable scale, together with the greater 
certainty of award that would be lent by the other reforms outlined, 
would go far in reducing the volume and expense of litigation. Fewer 
cases would come to trial, and jury awards would be more readily 
accepted without appeal. 

g) Payment should be guaranteed by adequate insurance. A great 
catastrophe or some other cause often leads to the insolvency of 
the employer at a time when the injured men and their dependents 
are most in need of assistance. Certain methods of guarantee are 
therefore used in Germany, Austria, France, and Italy, and more 
or less effective plans are followed in other countries. First lien on 
assets and compulsory state insurance are most frequently resorted 
to. The statutes of Massachusetts and New York provide that 
any employer may partially disburden himself of liability by insuring 
his men in private insurance companies, but he is not obliged to 
do so. In Montana a law passed in 1909 provides a special tax of 
I per cent on the earnings of coal-miners and of one cent per ton on 
all coal mined. The proceeds make up a state fund for the generous 
compensation of accidents in the coal-mining industry. Efforts 
to compel employers to insure their men against accident would be 
met with active resistance in the United States, and requirements 
as rigid as those of Germany and Austria would be justly condemned 
by public opinion. But to secure its citizens in their personal rights 
is a proper police function of the state, and our laws should insist 
that employers, at their own expense, insure their men for the amount 
of the stipulated compensations. Such guarantee should be by 
insurance in private, mutual, or governmental casualty concerns, 
or by the deposit of approved securities. 

h) Compensation payments should be conserved. Many persons 
left dependent are incompetent to care for large sums of money 
suddenly acquired. Courts of proper jurisdiction should be given 
authority to determine whether lump payments should be made 
or the sum invested in annuities. The pension systems of the conti- 
nental European states are rich in the suggestion of administrative 
methods for accomplishing this purpose. 

The incorporation of these principles into the American law of 
employers' liability will be found a long and difficult process, for 
many obstacles exist, both in social and economic conditions and in 



LABOR PROBLEMS 755 

constitutional law and judicial fancy. It is doubtful if adequate 
legislation can be enacted in many states without constitutional 
amendments, and it is not improbable that an amendment to the 
federal constitution will be found necessary. But the outlook is 
hopeful. Twelve years ago it was said of workmen's compensation, 
"The very principles involved are not as yet even comprehended in 
the United States." Public interest has since been aroused by the 
results of wide research; close attention has been turned upon every 
phase of the subject, and it is one of the leading topics before the 
American people at the present time. Employers, insurance men, 
lawyers, legislators, jurists, publicists, and leaders in social reform 
are focusing attention upon the question with a unanimity of interest 
that is almost unprecedented. It was a live issue before the last 
meeting of the National Civic Federation; it is constantly before 
associations of manufacturers and other bodies of employers, and 
there have been held within a year three national conferences upon 
this question alone. During the early months of 1909, changes in 
the law were under consideration in at least seventeen states. Signifi- 
cant amendments have been passed in some, while in others, notably 
in New York, Wisconsin, Minnesota, and Illinois, special commis- 
sions are making, or have completed, more or less exhaustive studies. 
In addition to this, two of the largest American employers, the United 
States Steel Corporation and the International Harvester Company, 
have instituted accident relief plans that are strikingly similar to 
the compulsory insurance and compensation systems of continental 
Europe. 

The situation presents a problem in the equitable distribution 
of the fruits of industry. Production commands a sufficient economic 
return to meet all of its legitimate charges, and a reasonable portion 
should be turned to the account of those unfortunates whom industrial 
accidents leave without means of livelihood. The costs fall with 
crushing force upon the individual victims. If these costs were 
to fall upon the enormous capital and tremendous earning power of 
the industrial world, they would seem insignificant. Yet absurd 
legal precedents set up generations ago, and now dishonored at their 
source, are effective barriers against proper distribution. Legislation 
that pulls down these barriers will add much to the security, content- 
ment, and efficiency of the workers of American industry. 



756 MATERIALS FOR ELEMENTARY ECONOMICS 

215. A SURVEY OF WORKINGMEN'S INSURANCE IN THE 
UNITED STATES' 

There are already various systems of industrial insurance in the 
United States which witness to the universal sense of need of such 
protection even among those workers who have least developed habits 
of thrift. These imperfect and unrelated schemes are yet to be 
developed, co-ordinated, regulated, and combined so as to form a 
consistent, comprehensive, and adequate system. The hope of 
progress lies in these germinal beginnings, and the problem imme- 
diately before the nation is one of synthesis. 

Is universal insurance an economic possibility? A complete 
answer to this question would require extended discussion. A few 
things may be suggested. The profit fund could carry a very large 
share of the burden, as shown by the fact that employers are marvel- 
ously prosperous, and by the fact that even now, though in a very 
uncertain way, they set apart a vast sum for helping workmen in 
times of disability in the form of contributions to sickness funds, 
hospitals, physicians, and gifts to families in distress, not to speak 
of taxes for public relief and enormous costs for casualty insurance 
and litigation, which is now waste. The wages fund could bear a 
much heavier drain for insurance if we can judge from the immense 
sums spent by workmen for objects which are destructive to health 
and morals. It is true that the unskilled workmen have no margin 
for adequate insurance, and those who cannot supply even the 
immediate necessities of existence can hardly be expected to provide 
for the future without help from the profit fund and from consumers. 

Systems and schemes of industrial insurance. — (i) The workingmen 
have themselves created organizations for insurance, and thereby 
express a universal sense of need of this protection; local mutual 
benefit societies, with or without aid from employers, national 
brotherhoods or fraternals, and trade-unions with local branches, 
(2) Employers have promoted the movement by various methods: 
local societies of employees, insurance departments of great firms 
or corporations, contracts between firms and casualty companies, 
pension schemes of employing corporations. (3) Private insurance 
companies which sell sickness and accident insurance to workmen, 
"industrial insurance companies," collecting small premiums weekly 
or monthly, and furnishing chiefly burial benefits to the low-paid 

' Adapted from C. R. Henderson, Industrial Insurance in the United States, 
chap. xii. The University of Chicago Press, 1909. 



LABOR PROBLEMS 757 

workmen, and regular life insurance to those who have higher wages. 
(4) Organizations of municipal, state, and federal employees for 
pension funds, as those of teachers, firemen, policemen; the national 
and state military pensions; homes for invalid veterans. Here also 
may be counted as auxiliary and supplementary government activities, 
poor relief, liability laws, protective factory laws and inspection, and 
state supervision of fraternal societies and insurance corporations. 
Every one of these agencies and organizations represents some begin- 
ning of a movement toward obligatory insurance. The cities have 
already recognized their duty to care for the policemen, firemen, and 
teachers; and it will be difficult to answer the question of other 
employees of cities, many of them far more in need of protection, 
why they should not be included'. The nation and the states have 
already declared it to be our duty to shelter the aged and wounded 
soldier; why should the victims of the "army of labor" be neglected ? 
They also have served their country in occupations even more danger- 
ous and destructive than war, and quite as useful. Public poor 
relief has already acknowledged the duty of the community to support 
its members who are incapable of labor; but experience has taught 
that this method tends to humiliate and degrade the recipients and 
it is manifestly better from every point of view to prevent the need 
of appeal to poor relief by creating an insurance fund so far as this 
is possible. 

Sickness insurance. — The present organs of sickness insurance 
are: local mutual benefit societies, lodges of the trade-unions and 
fraternal societies, relief departments of railroads, and casualty 
companies. Naturally this form of insurance is most widely developed 
among the workmen of cities. Everywhere the organization is 
voluntary, unless we may speak of constraint to enter the relief 
departments and other similar arrangements as a condition of employ- 
ment as compulsion. The local societies are seldom united in groups, 
and each bears its burden alone. Central direction and supervision 
by the state are unknown. The lodges of the fraternal societies and 
of some of the trade-unions work under control from a central legis- 
lature. The administration of the relief departments is in the hands 
of committees representing both employers and employees. Those 
who simulate sickness are discovered by medical examination, or 
by visits of committees. None of these agencies rests on a strictly 
scientific basis approved by actuaries. Even the rates of the insur- 
ance companies rest chiefly on empirical foundations, may be changed 



75S MATERIALS FOR ELEMENTARY ECONOMICS 

at any time, and are determined largely by competition. Frequently 
the companies regard each other with such suspicion that a common 
registration is said to be impossible; a fact much to be regretted, 
since a comparison of experience would aid in giving the movement 
the light of the widest and most varied experience. For the settle- 
ment of disputes between members and the directors, or between 
holders and companies, the courts are open; but this is a way too 
costly and tedious to be taken into consideration. It would be one 
of the advantages of compulsory insurance that the state could provide 
a simple and inexpensive arrangement for hearing and deciding cases 
impartially. 

Accident insurance. — The employers' liability law remains in its 
ancient limits; it is behind the British compensation act of 1897 
and much farther behind the German insurance law of 1884. The 
principle that social care in any explicit way is a duty of the com-» 
munity has never been openly recognized. The injured man stands 
at once over against his employer as an enemy seeking damages even 
of a punitive character. Before he can recover damages he must 
prove, with the presumption against him, that the injury can be 
traced to the negligence of the employer and is actually due to such 
negligence. Compulsory insurance or even compensation is not a 
part of the legal provisions. Voluntary organizations, fragmentary 
and unfair in character, are .further developed with the railroads than 
elsewhere. In agriculture there is hardly a discoverable attempt in 
this direction. 

The railroads have generally sought to insure their employees 
either through agreements with casualty companies or by relief 
departments; but the employees must carry the greater part of the 
burden. The employers in other dangerous trades have often 
organized accident insurance, but generally the schemes load the 
employees with premiums, cover only a part of the real loss, and lack 
full actuarial basis. There is nowhere state supervision, or direc- 
tion, no obligation to insure, no unity or uniformity of method; 
mostly anarchy. The administration varies with the form of organi- 
zation : in the mutual benefit associations the matter is directed by a 
committee with oflScers and clerks; in the trade-unions the lodge 
governs the direction; and in casualty companies all is administered 
by the central ofiice. 

Payment of income of funds. — In the relief departments of railroads 
and in the casualty companies the fund is provided by payment of 



LABOR PROBLEMS 759 

premiums at intervals in advance. No example has been found of 
groups of employers federated to provide accident insurance; and, 
indeed, the motive is lacking for such organization. It is significant 
that employers have organized such associations for fire insurance, 
in competition with the companies, and these seem to have worked 
well. The assessment plan of payment is customary in some life 
insurance companies, in fraternal societies, and in trade-unions, 
certain sums being levied at a death or at intervals during the year. 
In' settlement of disputes we have only contracts, conferences, and, 
in the last resort, the lawsuit. 

Old age and invalidism. — A few of the trade-unions have begun 
to establish funds for old-age retirement benefits. The fraternal 
societies exhibit a serious defect at this point. Under their system 
they can carry life insurance only to the region of old age and then 
the "brother" must care for himself, a very inconsistent kind of 
fraternity, yet inseparable from present methods. The Mutualists 
of France have gone much farther in meeting this difficulty by estab- 
lishing funds for old age and invalidism. Some of the railroad 
corporations and even private firms have founded funds for old-age 
pensions and this movement seems to be growing in the country. 
Cities have pension funds for policemen, firemen, and to some extent 
for teachers. The nation and the states have made the old age of 
veterans comfortable. It is perfectly clear that the common laborers 
of cities can never on present wages provide for old age without help 
of employers and the public; the outlook is simply hopeless. The 
income of the workingmen of cities is too small and too irregular to 
warrant any unaided attempt to provide for the last period of life. 
In the United States there is no example even of state subsidies to 
encourage voluntary associations, as in France and in Belgium. 
Powerful and wealthy corporations, as railroads, canals, ship builders, 
have not been above asking the government for subsidies to aid 
"infant industries," even when those industries have become aged 
and corpulent, but they would brand any attempt to subsidize old- 
age funds for workingmen as rank "socialism." 

Various are the methods of providing funeral funds and life 
insurance. The poorest workmen of. America count among their 
most necessary expenses the premiums which will provide money for 
a respectable funeral. Sickness and accident insurance come later, 
and the contingency of need in old age is to their imagination far 
more remote. The colossal sums poured annually from slender 



76o MATERIALS FOR ELEMENTARY ECONOMICS 

incomes into the coffers of the ''industrial insurance" companies are 
witness of the spirit of sacrifice which is inspired by the sentiment of 
repugnance to burial at public expense. The benefit departments 
of the fraternal societies and fraternal insurance societies prove the 
interest of skilled artisans in providing for future wants by insurance. 
Comparatively little has been done for unemployment insurance. 
Apart from occasional gifts of cities, or hastily planned emergency 
works, the public has manifested no interest in this burning question. 
During the past years of unexampled and long-continued prosperity 
the occasion for such insurance has not been so clear as it would be 
in a period of depression. 



LABOR PROBLEMS 



761 



"o 

3 £ 

II 

3(5 

0) 
C/2 


Free arbitration court 
and Imperial Insur- 
ance Office with 
equal representa- 
tion of employers 
and workmen 


C 
1 

3 a 

gg 


Free by Arbitration 
Court and Imperial 
Insurance Office 
with equal repre- 
sentation of em- 
ployers and em- 
ployed 


c 

PQ 


(a) Free medical treatment and 
pension up to 66| per cent of 
yearly wages; or free hos- 
pital treatment with relief 
to family up to 60 per cent 
of wages — from the 14th 
week after accident 

(A) Burial expenses up to 20 
times daily wages and pen- 
sion to survivors up to 60% 
of wages. 

Total compensations =37. 772.- 
648 to 980,044 persons; $38 . 44 
per injured workman 


(a) Medical treatment and sick 
pay (50 per cent of average 
daily wages) or free hospital 
treatment and one-half sick 
pay for the family for 26 
weeks 

(b) Similar benefits for con- 
finements for 6 weeks 

(c) Funeral expenses, 20 times 
average daily wages. Ex- 
tension of above minimum 
benefits by special rules 

$13-75 per year per sick mem- 
ber; $ . 70 per sick day 


(a) Invalidity pension after 200 

contributory weeks 
(6) Old age pension from 70th 

year after 1 200 contributory 

weeks 

(c) Free treatment and relief to 
family to prevent invalidity 

(d) Return of premiums in case 
of death, accident, or mar- 
riage before pension is due 

Average invalidity pension 
$41.50; old age pension 
$40; sickness pension $62 


B 

0,-, 

lb 


u 


By employers alone 

Premiums =$42, 890,- 
350; $2.03 per 
workman, $7.96 
per establishment 


Employers! [fJ^L 
WorkmenI \^%J 

Without contribu- 
tions of employers 

$4.29 by insured 
workman; $1.90 by 
employers per in- 
sured workman 


Equal premiums of 
employers and em- 
ployed with an 
annual state sub- 
sidy of $12.50 per 
pension 

$1.50 by workman; 
$1 . 50 by employers 
per workman; $.83 
by state per work- 
man; $3.83 total 
annual premium 


1 3 

|cK 
»S.2S 
•o|5 
fc 6 2 

M^ 

25 E 

^3 


Mutual trade asso- 
ciations and state 
executive boards for 
state employees 

114 trade associations 
and 535 executive 
boards; 5.383.519 
establishments and 
21,172,027 insured 


Mutual sickness so- 
cieties established 
by law and private 
friendly societies 

23,232 societies; 12,- 
480,502 members 
(inclusive of 758,- 
706 miners) 


Territorial insurance 
institutions 

41 institutions and 
14,958,118 insured 


3 
2 

3 

c 
c 

g 


Workmen irrespective of wages 
and inferior managing officials 
with yearly wages up to $750 
in industry and manufacture. 
Also by special rule — employes 
with wages over $750 and 
small employers 

Employers and persons not 
under compulsion 

Population 62,100,000; 15,400,- 
000 wage-earners 


Workmen and employes in in- 
dustry and commerce (with 
yearly earnings up to $500), 
and by special ruling to work- 
ers in agriculture and home 
industries 

Persons not obliged to insure 
with yearly earnings up to 

$500 

Population 62,100,000; 15,400,- 
000 wage-earners 


AU wage-earners and employes 
with yearly wages up to $500. 
Also, small employers and 
house workers by order of 
the Bundesrat 

Population 62,100,000; 15.400,- 
000 wage-earners 


32 

23 

£^ 

11 
Eq 
o-ci 


Compulsory insurance 
Laws of 1884-1887 
and 30, 6, 1900 

Voluntary insurance 
(by same laws) 


Compulsory insurance 
Laws of 15,6, 1883; 
10, 4, 1892; 5. 5. 
1886; 30, 6, 1900; 
25. 5, 1903 

Voluntary insurance 
(by same laws) 







aouBJnsni ^uappDy 


aDUBjnSUI SS3U5(31S 


aouBjnsuj 
XjipijEAui puB aSy pio 



XVII. INTEREST 

217. THEORIES OF INTEREST 
I' 

Early Theories. — An objection, formerly common, to the practice 
of taking .interest was that interest is "unnatural." The word em- 
ployed among the Greeks to signify interest or usury was tokos, 
"offspring"; and Aristotle declaimed against the taking of interest, 
on the ground that money could not have "offspring" — a curious 
instance of the influence of terminology on thought. 

Interest-taking between Jews was forbidden by the Mosaic laws, 
and similarly, in Rome, interest-taking between Romans was pro- 
hibited. Many biblical texts show the hostile attitude of the writers, 
both in the Old and New Testaments, toward the practice, and the 
Church Fathers through the Middle Ages for over a thousand years 
waged a ceaseless but fruitless war against interest-taking. St. 
Thomas Aquinas stated that interest was an attempt to extort a 
price for the use of things which had already been used up, as for 
instance, grain and wine. He also declared that interest constituted 
a payment for time, and that time was a free gift of the Creator to 
which all have a natural right. 

The unpopularity of interest-taking increased until the thirteenth 
century; but the practice persisted, and as business operations in- 
creased in importance, certain exemptions and exceptions from its 
general prohibition were secured. Pawnshops banks, and money- 
lenders were specially licensed, and permission was granted for buying 
annuities, and taking land on mortgage for money loaned. One of 
the subterfuges by which the allowance of interest was excused sug- 
gests the true idea of interest as an index of the relative preference for 
present over future goods. It was conceded that, whereas a loan 
should be nominally without interest, yet when the debtor delayed 
payment, he should be fined for his delay {mora), and the creditor 
should receive compensation in the form of interesse. Through this 
loophole it became common to make an understanding in advance, 
by which the payment of a loan should be "delayed" year after year, 
and with every such postponement a "fine "should become payable. 

' From Irving Fisher, The Rate of Interest, pp. 4-7. The Macmillan Co., 1907. 

762 



INTEREST 763 

Some of the Protestant reformers, while not denying that interest- 
taking was wrong, admitted that it was impossible to suppress it, and 
that it should therefore be tolerated. This toleration was in the same 
spirit as that in which many reformers today defend the licensing 
of vicious institutions, such as saloons, racetracks, lotteries, and houses 
of prostitution. 

In the sixteenth century interest-taking began to find some definite 
champions. Calvin attempted to discriminate between interest- 
taking which was right and interest-taking which was wrong. Among 
the wrong kinds he classed the taking of interest from the poor and 
from those in urgent need, and the taking of interest in excess of a 
legal maximum. 

In order to defend interest, its champions began to construct 
theories to account for the phenomenon. Most of these early theories 
were little more than a shifting of the problem. It was seen that 
capital earned income whether it was lent or not. The income which 
a lender obtains through a loan contract may be called explicit interest; 
but it was clear that the borrower was enabled to pay this interest 
because the capital which he borrowed earned it for him. The income 
which capital thus earns may be called implicit interest. The earliest 
attempt to construct a theory of interest merely explained explicit 
interest in terms of implicit interest. Salmasius and Locke, both in 
the seventeenth century, attempted thus to explain interest. They 
tried to justify the taking of interest in a loan on the ground that an 
equivalent to that interest was obtained by the borrower from the 
capital he borrowed, and might have been obtained by the lender of the 
capital had he retained it. If, they said, a man lends $1000, he is 
entitled to interest upon it because, had he used it in business himself, 
he could have made profits by means of it. But beyond the bare 
statement that unlent capital yields income, these theories did not go. 
The real problem — ''why capital yields income to the user" — was 
left untouched. 

The theories just described are for the most part obsolete today; 
yet we have a number of other theories almost equally crude. If a 
modern business man is asked what determines the rate of interest, 
he may usually be expected to answer, "the supply and demand of 
loanable money." But "supply and demand" is a phrase which has 
been too often forced into service to cover up difficult problems. 
Even economists have been prone to employ it to describe economic 



764 MATERIALS FOR ELEMENTARY ECONOMICS 

causation which they could not unravel. It was once wittily remarked 
of the early writers on economic problems, "Catch a parrot and teach 
him to say 'supply and demand,' and you have an excellent economist." 
Prices, wages, rent, interest, and profits were thought to be fully 
"explained'^ by this glib phrase. It is true that every ratio of 
exchange is due to the resultant of" causes operating on the buyer and 
seller, and we may classify these as "demand" and "supply." But 
this fact does not relieve us of the necessity of examining specifically 
the two sets of causes, including utility and its effect on demand, 
and cost in its effect on supply. Consequently, when we say that 
the rate of interest is due to the supply and demand of "capital" 
or of " money " or of " loans," we are very far from having an adequate 
explanation. It is true that when merchants seek to discount bills 
at a bank in large numbers and for large amounts, the rate of interest 
will tend to be high, and that when merchants do not apply in large 
numbers and for large amounts, the rate of interest will tend to be 
low. But we must inquire for what purposes and from what causes 
merchants thus apply to a bank for the discount of loans, and why it is 
that some apply to the bank for loans and other supply the bank with 
funds to be loaned. The real problem is: What causes make the 
demand for loans, and what causes make the supply ? This question 
is not answered by the summary " supply and demand " theory. The 
explanation is not simply that those who have much capital supply 
the loans and those who have little demand them. In fact, the con- 
trary is quite often the case. The depositors in savings banks are 
the lenders, and they are usually poor, whereas those to whom the 
savings bank in turn lends the funds are relatively rich. 

11^ 

The essential features as regards our problem, are that, over a 
year's time, manufactured products are sold at a price which not only 
covers the value of raw materials, reimburses the various wages of 
manual and intellectual labor, and replaces the fixed capital as worn 
out, but leaves over that amount of value which is divided out among 
the capitalist shareholders as interest. In normal capitaHst pro- 
duction, that is to say, not only is the value of capital consumed in 
the production process replaced, but a surplus of value appears. It 
has not always been perceived by economists that this surplus value 

' Adapted from William Smart's Translator's Preface to Capital and Interest, 
by Eugen von Bohm-Bawerk, pp. vii-xvii. Macmillan & Co., 1890. 



INTEREST 765 

is the essential phenomenon of what we call interest — that interest on 
capital consists of this very surplus value and nothing else — but when- 
ever it is perceived the question almost suggests itself: What does this 
surplus value represent ? Is it merely a surplus, or is it of the nature 
of a wage ? In other words, is it something obtained either by chance 
or force, and corresponding to no service rendered by anybody or 
anything; or is it something connected with capital or the capitalist 
that, economically speaking, deserves a return or a wage ? 

A little consideration will show that the idea of a "mere surplus" 
is untenable. When a manufacturer engages his capital in production 
he, as it were, throws it into solution, and risks it all on the chance 
of the consuming public paying a certain price for the products 
into which his capital is transformed. If they will not pay any price 
at all the capital never reappears; even the labor, which bound up 
its fortunes with the materials and machinery of manufacture, loses 
its wage, or would do so except for the wage contract which pays 
labor in advance. If the consumers, again, will only pay a price 
equal to the value of the capital consumed, the various workers, 
including the employer proper, will get their wage and the value of 
the capital itself will be unimpaired, but there will be no interest. It 
is only if the consumers are willing to pay a higher price that capital 
can get its interest. 

The surplus then may be assumed to represent something con- 
tributed by the capital to the value of products. This view is sup- 
ported by the common consciousness of practical men, who certainly 
believe that capital plays a distinct and beneficent role in production. 

If, now, we appeal to the common consciousness to say what it 
is that capital does, or forbears to do, that it should receive interest, 
we shall probably get two answers. One will be that the owner of 
capital contributes a valuable element to production; the other, that 
he abstains from using his wealth in his own immediate consumption. 
On one or other of these grounds, the capitaHst is said to deserve a 
remuneration, and this remuneration is obtained by him in the shape 
of interest. 

Now it might possibly be the case that both answers point to 
elements indispensable in the explanation of interest, but a slight 
consideration will show that the two answers are very different from 
one another. The one is positive — that capital does something; the 
other negative — that the capitalist abstains from doing something. 
In the one case interest is a payment for a tool; in the other, a recom- 



766 MATERIALS FOR ELEMENTARY ECONOMICS 

pense for a sacrifice. In the one case the capitalist is paid because the 
capital he lends produces, or helps to produce, new wealth; in the 
other he is paid because he abstains from diminishing wealth already- 
produced. The first answer is the basis of the Productivity theories 
and of the Use theories; the second is the basis of the Abstinence 
theory. 

The argument of the Productivity theory may be put thus: 
Human labor, employing itself on the materials given free by nature, 
and making use of no powers beyond the natural forces which manifest 
themselves alike in the laborer and in his environment, can always 
produce a certain amount of wealth. But when wealth is put into 
the active forms of capital — of which machinery may be taken as 
instance and type — and capital becomes intermediary between man 
and his environment of nature, the result is that the production of 
wealth is indefinitely increased. The difference between the results 
of labor unassisted and labor assisted by capital is, therefore, due to 
capital, and its owner is paid for this service by interest. 

The simpler forms of this theory (where capital is credited with a 
direct power of creating value, or where surplus of products is tacitly 
assumed to be the same thing as surplus of value) Bohm-Bawerk 
has called the Naive theory. The more complex formulations of it 
— where, for instance, emphasis is laid on the displacement of labor 
by capital, and interest is assumed to be the value formerly obtained 
as wage, or where prominence is given to the work of natural powers 
which, though in themselves gratuitous, are made available only in the 
forms of capitalist production — he has called the Indirect theories. 

If, however, we demand an answer to what we have formulated 
as the true problem of interest, we shall make the discovery that the 
Productivity theory has not even put that problem before itself. 
The amount of truth in the theory is that capital is a most powerful 
factor in the production of wealth, and that capital, accordingly, is 
highly valued. But to say that capital is "productive" does not 
explain interest, for capital would still be productive although it 
produced no interest; e.g., if it increased the supply of commodities 
the value of which fell in inverse ratio, or if its products were, both 
as regards quantity and value, greater than the products of unassisted 
labor. The theory, that is to say, explains why the manufacturer has 
to pay a high price for raw materials, for the factory buildings, and 
for machinery — the concrete forms of capital generally. It does not 
explain why he is able to sell the manufactured commodity, which is 



INTEREST 767 

simply these materials and machines transformed by labor into 
products, at a higher price than the capital expended. It may explain 
why a machine doing the work of two laborers is valued at £100, but 
it does not explain why capital of the value of £100 now should rise to 
the value of £105 twelve months hence; in other words, why capital 
employed in production regularly increases to a value greater than 
itself. It cannot be too often reiterated that the theory which 
explains interest must explain surplus value — not a surplus of products 
which may obtain value and may not; not a surplus of value over the 
amount of value produced by labor unassisted by capital; but a sur- 
plus of value in the product of capital over the value of the capital 
consumed in producing it. 

I confess I find some diflSculty in stating the economic argument 
of what Bohm-Bawerk has called the Use theory of interest, and I 
am almost inclined to think that he has done too much honor to some 
economists in ascribing to them this theory, or, indeed any, definite 
theory at all. 

It is of course a familiar expression of everyday life that interest 
is the price paid for the "use of capital," but most writers seem to 
have accepted this formula without translating it. If the formula, 
however, is considered to contain a scientific description of interest, 
we must take the word "use" in something like its ordinary signifi- 
cation, and consider the "use of capital" as something distinct from 
the capital itself which affords the use. The loan then will be a 
transfer and sale of this "use," and it becomes intelligible how, at 
the end of the loan period, the capital lent is returned undeteriorated 
in value; it was not the capital that was lent, but the use of the capital. 
To put it in terms of ^astiat's classical illustration: James, who 
lends a plane to William, demands at the year's end a new plane in 
place of the one worn out, and asks in addition a plank, on the os- 
tensible ground that over a year William had the advantage, the use of 
the plane. 

If, however, we look carefully into this illustration, we shall see 
that William not only had the use of the plane but the plane itself, as 
appears from the fact that the plane was worn out during the year. 
Here then the using of the plane is the same thing as the consumption 
of the plane; payment for a year's "use" is payment for the whole 
capital value of the plane. Yet the payment demanded at the year's 
end is not the capital value of the plane, the sum lent, but also a 
surplus, a plank, under the name of interest. To put it another way: 



768 MATERIALS FOR ELEMENTARY ECONOMICS 

If William on the ist of January had bought the plane outright from 
James, he would have paid him on that date a value equivalent, say, 
to a precisely similar plane ; he would have had the " use " of the plane 
over 365 days; and by 31st December the plane would have been 
consumed. As things are, he pays nothing on ist January; he has the 
use of the plane over the year ; by 3 1 st December the plane is consumed ; 
and next day he has to pay over to James a precisely similar plane 
plus a plank. The essential difference between the two transactions 
is that, on ist January the price of the plane is another similar plane; 
on 31st December it is a plane plus a plank. 

The true nature of the loan transaction is, not that in it we get the 
use of capital and return it deteriorated, but that we get the capital 
itself, consume it, and pay for it by a new sum of value which some- 
how includes interest. If, however, we admit this, we are landed in the 
old problem once more — ^how do goods, when used as capital in pro- 
duction, increase in value to a sum greater than their own original 
value? and the Use theory ends in raising all the difficulties of the 
Productivity theories. 

We have seen that the previous theories were founded on some 
positive work supposed to be done by capital. The Abstinence 
theory, on the other hand, is founded on the negative part played by 
the capitalist. Wealth once produced can be used either in immediate 
consumption — that is, for the purposes to which, in the last resort, all 
wealth is intended; or it can be used as capital — that is, to produce 
more wealth, and so increase the possibilities of future consumption. 
The owner of wealth who devotes it to this latter purpose deserves a 
compensation for his abstinence from using it in the former, and inter- 
est is this compensation. It must be carefully noted that the absti- 
nence here spoken of is not abstinence from personal employment of 
capital in production — that would simply throw us back on the 
previous question, viz., how the owner could make interest (as 
distinct from wage) by the use of his capital — but abstinence from 
immediate consumption in the many forms of personal enjoyment 
or gratification. 

At the back of this theory of interest is that theory of value which 
makes it depend upon costs of production. Senior, the first and princi- 
pal apostle of the Abstinence theory, saw very clearly that the inclu- 
sion of interest or profit among costs was an abuse of language. The 
word "Cost" implies sacrifice, not surplus. But in production, as it 
seemed to him, there was another sacrifice besides the prominent one 



INTEREST 769 

of labor, that of abstinence, and interest in his view was the compensa- 
tion for this sacrifice. 

But to account for the origin of capital by abstinence from con- 
sumptive use is one thing; to account for interest is another. In all 
production labor sacrifices life, and capital sacrifices immediate enjoy- 
ment. It seems natural to say that one part of the product pays 
wage and another pays interest, as compensation for the respective 
sacrifices. But labor is not paid because it makes a sacrifice, but 
because it makes products which obtain value from human wants; 
and capital does not deserve to be paid because it makes sacrifices — 
which is a matter of no concern to anyone but the capitalist — but 
because of some useful effect produced by its co-operation. Thus 
we come back to the old question: What service does capital render 
that the abstinence which preserves and accumulates it should get a 
perpetual payment ? And if, as we saw, productivity cannot account 
for interest, no more can abstinence. 

Now if, when the onus of justifying its existence is thrown upon 
capital, economic theory can only account for this income without risk 
and without work by pointing to the "productive power" of capital, 
or to the "sacrifice of the capitalist," it is easy to see how another 
theory should make its appearance, asserting that interest is nothing 
else than a forced contribution from helpless or ignorant people; a 
tribute, not a tax. Rodbertus' picture of the working man as the 
lineal descendant of the slave — "hunger a good substitute for the 
lash " ; Lassalle's mockery of the Rothschilds as the chief " abstainers " 
in Europe; Marx's bitter dialectic on the degradation of labor, are all 
based on generous sympathy with the helpless condition of the working 
classes under capitalist industry, and many shut their eyes to the weak- 
ness of Socialist economics in view of the strength of Socialist ethics. 

The Exploitation theory then makes interest a concealed contri- 
bution; not a contribution, however, from the consumers, but from 
the workers. Interest is not a pure surplus obtained by combination 
of capitalists. It does represent a sacrifice made in production, but 
not a sacrifice of the capitalists. It is the unpaid sacrifice of labor. 
It has its origin in the fact that labor can create more than its own 
value. A laborer allowed free access to land, as in a new country, 
can produce enough to support himself and the average family, and 
have besides a surplus over. Translate the free laborer into a wage 
earner under capitalism, pay him the wage which is just sufficient to 
"Upport himself and his family, and here also it is the case that he can 



770 MATERIALS FOR ELEMENTARY ECONOMICS 

produce more than his wage. Suppose the laborer to create the value 
of his wage, in six hours' work, then, if the capitalist can get the 
worker to work longer than six hours for the same wage, he may pocket 
the extra value in the name of profit or interest. Here the modern 
conditions of industry favor the capitalist. The working day of ten 
to twelve hours is a sort of divine institution to the ignorant laborer. 
As the product does not pass into his own hand, he has no means of 
knowing what the real value of his day's work is. The only lower limit 
to his wage is that sum which will just keep himself and his family 
alive, although, practically, there is a lower limit when the wife and 
children become the breadwinners and the capitalist gets the labor of 
five for the wage of one. On the other hand, the increase of wealth 
over population gradually displaces labor, and'allows the same amount 
of work to be done by fewer hands; this brings into existence a 
"reserve" to the industrial army, always competing with those left 
in work, and forcing down wages. Thus the worker, unprotected, 
gets simply the reproduced value of a portion of his labor; the rest 
goes to capital, and is falsely, if conscientiously, ascribed to the 
efficiency of capital. 

Ill 

The Agio and Impatience Theories of Interest. — The discussion 
in the preceding section has at several points suggested that the source 
of interest may be something very different from what is emphasized 
in the Productivity Theory or in the Use Theory. It is especially 
significant that the emergence of the phenomenon of interest seems to 
depend on the intervention of a certain interval of time between 
borrowing and paying. With this fact in mind Dr. von Bohm-Bawerk 
has maintained that the loan is in reality an exchange of present goods 
against future goods. 

Present goods invariably possess a greater value than future goods of 
the same number and kind, and therefore a definite sum of present goods 
can, as a rule, only be purchased by a larger sum of future goods. Present 
goods possess an agio in future goods. This agio is interest. It is not a 
separate equivalent for a separate and durable use of the loaned goods, for 
that is inconceivable; it is a part equivalent of the loaned sum, kept sepa- 
rate for practical reasons. The replacement of the capital + the interest 
constitutes the full equivalent.^ 

Bohm-Bawerk explains that the universal preference for present 
goods as contrasted with future goods is due to the following circum- 

' E. von Bohm-Bawerk, Capital and Interest (Smart's translation), p. 259. 



INTEREST 771 

stances: (i) Future goods are perceived with greater difficulty and 
furnish less compelling motives for action than goods which are 
immediately at hand; (2) present goods are relatively scarcer than 
future goods; (3) present goods have a "technical superiority" over 
future goods in the productive process. This is due to the fact that 
the longer processes of production characteristically give a greater 
return from a given combination of labor and capital. Hence present 
goods are superior in industry and easily command a premium. 

Dr. Bohm-Bawerk's theory of Interest, then, is an expansion of an idea 
thrown out by Jevons but not applied. "The single and all-important 
function of capital," said Jevons, "is to enable the laborer to await the 
result of any long-lasting work — to put an interval between the beginning 
and the end of an enterprise." Capital, in other words, provides an indis- 
pensable condition oi fruitful labor in affording the laborer time to employ 
lengthy methods of production.' 

Professor Fisher, while accepting the Agio Theory in the main, has 
modified Bohm-Bawerk's explanation by omitting the concept of 
"technical superiority," which he believes not to be present, from 
the list of causes of the preference for present goods, and by further 
developing the psychological effect of the individual's income-stream .=* 

The essence of interest is impatience, the desire to obtain gratifications 
earlier than we can get them, the preference for present over future goods. 
It is a fundamental attribute of human nature; and as long as it exists, so 
long will there be a rate of interest. 

Interest is, as it were, human impatience crystallized into a market 
rate. The market rate of interest is formed out of the various degrees or 
rates of impatience in the minds of different people. The rate of impatience 
in any individual's mind is his preference for an additional dollar, or 
one dollar's worth of goods, available today, over an additional dollar, or 
dollar's worth of goods, available a year from today. In other words, it is 
the excess of the marginal desirability of today's goods over the marginal 
desirability of next year's goods viewed from today's standpoint. It can 
be expressed in numbers as the premium that a man is willing to pay for 
this year's over next year's goods. If, for instance, in order to get $1 today 
he is willing to promise to pay $1 . 05 next year, then his rate or degree of 
impatience is said to be five per cent. The present $1 is worth to him 
so much that in order to get it he is willing to pay for it five per cent more 
than $1 in the future.^ 

' Smart, op. cit., p. xx. 

* "A flow of services through a period of time is called income." Irving Fisher, 
Tlie Nature of Capital and Income, p. 52. The Macmillan Co., 1906. 

3 Irving Fisher, Elementary Principles of Economics, pp. 371-72. The Mac- 
millan Co., 1912. 



772 MATERIALS FOR ELEMENTARY ECONOMICS 

The degree of impatience depends, in the first place, upon the 
personal characteristics of the individual; upon his foresight, self- 
control, habit, expectation of life, and love of posterity. In the second 
place it depends upon his 

whole future stream of satisfactions, i.e., what we call his final enjoyable 
income. It will depend on three chief characteristics of that income: first, 
as just said, it will depend on its distribution in time,' i.e., the relative 
abundance of his immediate as compared with his remote satisfactions; 
secondly, on the amount of the income, i.e., whether his satisfactions are, 
as a whole, scant or abundant; thirdly, on the uncertainties of the income, 
i.e., to what extent his satisfactions throughout future years are subject to 
chance, that is, may turn out to be greater or less than he first expected.^ 

Obviously the degree of preference will vary from individual to 
individual. Hence it is necessary to show how these many divergent 
rates of preference bring about a current interest rate. If we assume 
a perfect loan- and investment-market in which all risk, both in 
respect to the certainty of the expected income-streams of the various 
individuals, and in respect to the certainty of repayment of loans, 
is eliminated, the rates become equalized in the following manner: 

If any particular individual has a rate of impatience above the market 
rate, he will sell some of his surplus future income to obtain (i.e., "borrow") 
an addition to his present meager income. This will have the effect of 
decreasing the desirability of his present income and increasing the desir- 
ability of the remaining future income. The process wUl continue until the 
rate of impatience of this individual is equal to the rate of interest. In 
other words, a person whose impatience rate exceeds the current rate of 
interest will borrow up to the point at which the two rates will be equal. 
Reversely, a man who, with a given income-stream, has a rate of impatience 
below the market rate, will sell (i.e., "lend") some of his abundant present 
income to eke out the future, the effect being to increase his rate of im- 
patience until it also harmonizes with the rate of interest.^ 

It should be noted [however] that borrowing and lending are not the 
only ways in which one's income-stream may be modified. The same result 
may be accompUshed simply by buying and selling property; for, since 
property rights are merely rights to particular income-streams, their 
exchange substitutes one such stream for another of equal value but differ- 
ing in distribution in time, or certainty^^ 

We have seen that from the standpoint of the individual, when a rate 
of interest is given, he will adjust his rate of impatience to correspond with 
that rate of interest. 

'Fisher, Elementary Principles of Economics, p. 379. 
' Ibid., p. 390. 3 Ibid., p. 394. 



INTEREST 773 

For him the rate of interest is a relatively fixed fact, since his own rate 
of impatience and resulting action can affect it only infinitesimally. All he 
can do is to adjust his rate of impatience to the rate of interest as he finds it. 
For society as a whole, however, these rates of impatience determine the 
rate of interest.' 

Thus the rate of interest is the common market rate of impatience for 
income, as determined by the supply and demand of present and future 
income. Those who are very impatient strive to acquire more present 
income at the cost of future income, and tend to raise the rate of interest. 
These are the borrowers, the spenders, the buyers of goods which afford 
immediate gratification, the sellers of property yielding remote income, 
such as bonds and stocks. On the other hand, those who — being relatively 
patient — strive to acquire more future income at the cost of present 
income, tend to lower the rate of interest. These are the lenders, the 
savers, the investors.^ 

218. INTEREST RATES^ 

The published rates on money loaned on the New York market 
include two sets of quotations under the head "Call Loans," namely, 
call loans at the stock exchange and at banks and trust companies; 
seven under the head "Time Loans," namely, 30-, 60-, and 90-day, 
and 4-, 5-, 6-, and 7-month; and three under the head "Commercial 
Paper," namely, double name, choice 60- to 90-days, and two varieties 
of single name, prime 4- to 6-months, and good 4- to 6-months. In 
the weekly summaries contained in the Commercial and Financial 
Chronicle the minimum and maximum quotations for each class of 
loans are given, and, in the case of call loans at the stock exchange, the 
weekly average in addition. A comparison of these quotations reveals 
some interesting facts. 

The call-loan rate at the stock exchange differs from that charged 
at the same time at banks and trust companies, both in magnitude 
and range. During the last eleven years its minimum has ordinarily 
been below that at banks and trust companies by amounts varying 
from I per cent to 6 per cent, but most frequently by ^ per cent. 
During 72 weeks of the period the minimum quotations at both places 
were identical. The average rate at the stock exchange during the 
same period was above the minimum at banks and trust companies by 
amounts varying from | per cent to 34 per cent but most frequently 

' Ibid., p. 398. 2 Jbid., p. 399. 

5 Adapted from W. A. Scott, "Rates on the New York Money Market 1896- 
1906," in The Journal of Political Economy, XVI, 273-98 (.May, 1908). 



774 MATERIALS FOR ELEME-NTARY ECONOMICS 

by I per cent. These two quotations were identical during 138 of the 
572 weeks under investigation. The range of rates at the stock 
exchange is much greater than at banks and trust companies, being 
most frequently between i per cent and 2^ per cent, while at banks 
and trust companies it was zero during 339 of the 572 weeks of the 
period, and less than i per cent during 470 weeks. In spite of these 
differences, however, the fluctuations of the rates at both places are 
in general the same, those at banks and trust companies changing less 
frequently and within a narrower range, but nevertheless following 
faithfully all the more important movements of the stock-exchange 
rate. 

The five varieties of time loans quoted regularly^ also often differ 
from each other in magnitude and range. A comparison of the 
minimum quotations for the last eleven years reveals the general rule 
that the rate tends to rise as the length of the loan increases, but to 
this rule there are many exceptions. For example, in 1 26 weeks of the 
period the minimum rates were identical for all classes of time loans. 
The 90-day and 60-day minimum rates were identical in 308 weeks, 
the 4-months and 90-day in 320 weeks, the 5-months and 4-months in 
374 weeks, the 6-months and 5-months in 501 weeks. 

The difference between these quotations rarely exceeds | per cent, 
and the general rule seems to be that the influence of time in raising 
the rate grows less as the length of the loan increases. For example, 
there is apt to be a greater difference between the quotations of 60- 
and 90-day paper than between 90-day and 4-months. Likewise, 
there is a greater difference between 90-day and 4-months than 
between 4-months and 5-raonths paper. 

The range of time loans is much less than that of call loans, being 
rarely above ^ per cent in a given week, and on all classes being zero 
during the great majority of the 572 weeks investigated. The 
tendency for the rate to vary during the week grows stronger as the 
period of the loan increases. In the case of 60-day loans, for example, 
there were variations in only 162 of the 572 weeks, while in that of 
90-day loans there were variations in 190 weeks, and in that of 
4-months loans, in 238 weeks. 

During the greater part of the last eleven years the rates on all 
classes of time loans have averaged higher than those on call loans. 

' Sixty- and 90-day and 4-, 5-, and 6-months. Thirty-day and 7-months 
paper is frequently, but not always quoted, and it was therefore omitted from the 
calculation. 



INTEREST 



775 



This was true of the annual averages of these rates for seven of the 
eleven years and of the monthly averages for 86 of the 132 months of 
the period. The exceptions to this rule, however, are important, and 
to their significance I shall refer a little later. 

A comparison of the quotations on commercial paper reveals the 
same kind of differences that are noted in the case of call and time 
loans. The minimum rate on double-name paper is usually below 
that on single-name, but during 254 of the 572 weeks of the period it 
was identical with that on prime single-name paper. The difference, 
when one exists, is usually j per cent. The range for single-name 

Monthly Averages of Typical Rates for the Period 1806- iqo6 



% 



e 



A= Commercial paper, double name 6o-day. 
B = 60-day time. 
C=CaU loan. 

paper is usually greater than for double-name and the fluctuations are 
more frequent. As compared with the rates on time loans, running 
for the same period, that on commercial paper, as a rule, averages 
higher. The exceptions to this rule correspond in time to those men- 
tioned above in which the call-loan rate averaged above that on 
60-day time. 

A study of the monthly, as distinguished from the annual, averages 
clearly reveals certain seasonal fluctuations. These are indicated on 
the above chart, which represents the rates for each month averaged 
for the entire eleven years. 



776 MATERIALS FOR ELEMENTARY ECONOMICS 

It will be observed that for all the rates these eleven-year averages 
indicate a decline at the beginning of the year, a rise in the spring, 
another decline in the early summer and a heavy rise in the late 
summer and early fall. With the exception of the call rate, which rose 
steadily from September to the end of the year, they also indicate a 
reaction from the fall rise in October and November, followed by a 
sharp rise in December, in the case of the time rates, and by a still 
further decline in the case of the commercial-paper rates. 

A more detailed study of each year confirms the regularity of these 
seasonal fluctuations. For example, with the exception of 1899,^ all 
the rate averages fell in January and February of each year. To the 
rule of a spring rise there were exceptions only in 1896 and 1904. 
The fall in rate averages in the early summer occurred regularly each 
year. As a rule, it continued through May and June, but in 1901 and 
1902 the spring rise in all the rates continued into May, so that the 
June average alone showed a fall, and the same thing happened to the 
call and time rates in 1904 and to the commercial-paper rate in 1899. 
In 1903, in the case of all the rates, the fall continued through May 
only, the June average being higher, and in 1905 the same was true of 
the call and time rates. 

Regarding the upward movement m the late summer and early fall 
the monthly averages indicate some irregularities. Ordinarily it 
began in July and continued through September. Sometimes, how- 
ever, as in 1897, 1900, 1904, 1905, and 1906, the early summer decline 
continued into July, making the average for that month, in the case 
of some or all of the rates, lower than in June. In August the call 
and time rates (one or both) fell in 1899, 1901, 1902, 1903, 1904, and 
1905. For all the rates the upward movement continued through 
October in 1900 and 1904, and to the end of the year in 1899 and 1905. 
The call and time rates continued to rise throughout October in 1896 
and to the end of the year in 1904. 

The movements of rates during the last quarter of the year do not 
exhibit the same degree of uniformity and regularity as in the other 
seasons. A reaction from the high rates of the autumn was the rule.^ 
However, the averages of none of the rates fell in the last quarter of 
1899 or of 1905, and neither the call- nor the time-rate averages fell in 

' In 1899 the call-rate average rose in January and fell in February, and the 
time and commercial-paper rate averages fell in January and rose in February. ■ 

2 It occurred in eight of the eleven years in the call and time rates and in nine 
of the eleven years in the commercial-paper rate. 



INTEREST 777 

the last quarter of 1903 or of 1904. The average call rate also rose 
steadily from August to December of 1900. The time within the 
quarter at which this reaction takes place is not the same in the 
different years and varies considerably between the different rates in 
the same year. Most frequently it happened in October, but often in 
November.' In 1896 the averages of all the rates fell in November 
and December, the decline continuing through February of the follow- 
ing year. A rise in December occurred in the average of the call 
rate each year except 1896, and in that of the time rates each year 
except 1896 and 1903. The commercial-paper rate average rose in 
December only in the years 1890, 1902, 1904, and 1905. 

In the investigation of the causes of the fluctuations of rates, and 
the influence they exert upon each other, the average call-loan rate at 
the stock exchange, the minimum rate on 60-day time loans, and that 
on double-name 60- to 90-day commercial paper have been selected as 
typical each of its class. A detailed comparison by means of charts 
indicates that the fluctuations of the other rates in each class are 
almost identical with these, and that the conclusions to be drawn from 
a study of these three will apply equally well to the others. 

In all their principal and in most of their minor fluctuations these 
three rates move together. In degree of change the call-loan rate was 
decidedly the champion, the 60-day time rate, as a rule, occupying 
second, and the commercial-paper rate third place. The cases in 
which these statements do not hold true are decidedly exceptional. 
These facts point clearly to influences common to all the rates as the 
chief causes of their fluctuations. 

The causes of the rate fluctuations which have been noted must be 
sought chiefly in the influences which have affected the relations 
between the supply of and the demand for loanable funds on the New 
York market. The best available key to these influences is the 
surplus reserves of the Associated Banks. They are the nearest ap- 
proximate measure of the amount of the loan fund at any given time. 

Both the total money holdings of the banks and the surplus 
reserves performed four major and several minor fluctuations each 
year during the period under discussion. They regularly decreased 

' The call-rate average fell in October in 1898, 1901, 1902, and 1906, and in 
November in 1896, 1897, and 1902; the time-rate averages fell in October in 1898, 
1901, 1902, and 1906, and in November in 1896, 1897, and 1900; the commercial- 
paper rate average fell in October in 1897, 1901, 1903, and 1906, and in November 
in 1896, 1897, 1900, 1902, and 1904. 



778 MATERIALS FOR ELEMENTARY ECONOMICS 

from the beginning of February to the end of the first week in April; 
increased from that date to the end of July; decreased again to the end 
of the first week in November, and then increased to the end of 
January. Among the minor movements the most important were: 
an increase in the month of October; a fall in December; and down- 
ward movements during the early parts of the summer months. 
These latter were sometimes great enough approximately to offset the 
effects of the normal summer rise, the line on the chart^ during these 
years waving up and down without much if any tendency to rise. 
Many other fluctuations occurred, but they do not exhibit any marked 
degree of regularity. 

The causes of fluctuations in the total money holdings of the 
Associated Banks are the movements of currency to and from the 
interior, to and from local territory, the operations of our independent 
treasury system, and imports and exports of gold. In order approxi- 
mately to determine the relative importance of these influences, the 
weekly net gains and losses to these banks from each of these move- 
ments were calculated, and their relative magnitudes compared. 
The results indicate that in their effect upon the reserves of the 
Associated Banks the interior currency movement was first in impor- 
tance, the movement between the banks and their customers in New 
York City and its immediate vicinity second, that between the banks 
and subtreasury third, and that between the banks and foreign 
countries fourth. The degree of importance of each of these move- 
ments is approximately indicated by the figures 233, 153, 131, and 49, 
representing the number of weeks respectively each contributed most 
toward the change in the magnitude of the reserves. The pre-eminent 
importance of the internal currency movement is still further empha- 
sized by the fact that this movement also occupied second place more 
frequently than any of the others. Of the 571 weeks covered by the 
investigation it occupied either first or second place during 420 weeks, 
the subtreasury movement during 298, the local movement during 
297, and the external gold movement during 112. 

The accompanying Table III^ indicates the relative importance 
of each of these movements for each month in the year during the 
period under discussion. It shows that the internal currency move- 
ment occupied first place in relative importance in every month 
of the year except March, when the influence of the subtreasury 
was greatest; that the local movement was second in importance in 

' Omitted in this adaptation. — Editors. 



INTEREST 779 

every month except May, August, and November, when the sub- 
treasury movement occupied that place. The external gold move- 
ment was least important of the four in every month except May, 
when the local movement occupied that place. 

In degree of importance the local and subtreasury movements do 
not greatly differ. During the first three years of the period the 
subtreasury movement was the greater of the two in magnitude, and 
since that time, every year without exception, the local movement has 
been greater. 

It is quite impossible by statistical or other processes to segregate 
and measure the various elements which together constitute the 
demand for loans. Every branch of industry, doubtless, contributes 
its quota, but there is no way of determining accurately how large this 
quota is or precisely how it affects the open market rates here under 
consideration. In the case of one of these elements, however, namely, 
the stock-market demand, it is desirable that we should approximate 
a measurement as closely as possible, since public opinion and current 
discussion apparently agree in assigning it a very great, if not a 
dominating, influence on the New York market. 

Unfortunately, in the reports of the Associated Banks, loans are 
not classified, and it is, therefore, impossible to compare changes in 
rates from week to week with changes in the magnitude of loans to 
stock exchange operators. We may, perhaps, arrive at similar 
results, however, by a round-about process. 

The comptroller of the currency classifies the loans of the national 
banks of New York City for one date each year, and thus enables us 
to determine approximately what percentages of the total loans of 
these banks, on the average, are subject to stock-market conditions. 
We shall not do great violence to truth if we assume that these figures 
represent approximately the state of affairs for all the Associated 
Banks. 

If these figures represent average conditions throughout the period 
the percentage of call loans on stock-exchange collateral to total loans 
is normally in excess of 40, that of time loans secured in the same way, 
in excess of 20, and that of the two classes of loans combined, in excess 
of 60. It is probably safe to say, therefore, that, on the demand side, 
at least one-half the loans of the New York City banks are normally 
subject to stock-market conditions. 

We may not assume that whenever the movement up or down of 
the call-rate a^■erage corresponded in time with that of the volume of 



780 MATERIALS FOR ELEMENTARY ECONOMICS 

transactions on the stock exchange the latter was the cause of the 
former. In 46 of the 68 months in which this was true the fluctuations 
of the reserves would equally well have explained the movements of 
the call rate. The true interpretation of these statistics would seem 
rather to be that the demand for loans on the stock exchange at all 
times constitutes a large percentage^ of the total demand, but that 
about half of the time its influence on rates is more than counter- 
balanced by other influences; that in about two- thirds of the instances 
in which the call rates move in the direction indicated by the stock 
market demand, the reserves have contributed to the movement 
in at least an equal degree; and that only occasionally, according to 
the above statistics in 22 of the 132 months, has this demand 
actually determined the direction of the rate movement. 

In order to do complete justice to the influence of the New York 
Stock Exchange on rates, account must be taken of the intensity as 
well as of the magnitude of the demand for loans which it occasions. 
Many times during the last eleven years, when banks have been 
obliged to call their loans, the needs of stock brokers have been so 
pressing as to force rates to very great heights.^ These occasions have 
usually, though not always, been marked by excessive activity on the 
exchange, but the magnitude of the change in rates in such cases was 
greatly in excess of what the sales would normally have produced. 
The initial cause of the change in rates in these cases has been quite 
as often off as on the stock exchange. For example, the call of loans 
in the latter part of October and the early part of November, 1896, 
was caused by a money stringency produced by the free-silver agita- 
tion just preceding the presidential election of that year. The initial 
movement toward high rates in December, 1905, and in January, 
April, September, and December, 1906, came from the supply rather 
than the demand side of the market. On the other hand, the initial 
cause of the rate movements in December, 1899, and May, 1901, was 

' It will not, of course, do to assume that all loans on stock-exchange collateral 
are made by operators on the stock exchange and that the funds thus borrowed are 
used in the purchase of stocks. In the light of the above statistics, however, it is 
probably safe to assume that a large percentage of such loans are so used. 

^The call rate rose to 127 per cent on October 29, 1896; to 96 per cent on 
November 2, 1896; to 186 per cent on December 18, 1899; to 75 per cent on May 
9, 1901; to 125 per cent on December 28, 1905; in 1906 to 60 per cent on January 
2, to 30 per cent on April 5 and 6; to 40 per cent on September 5, and to 45 per 
cent on December 31. 



INTEREST 781 

stock-market panics. In all these cases, however, the excessive 
height of the rates must be attributed to the high pressure to which 
stock-market operators were subjected. 

The element of risk is always operative on the New York market 
and must be considered in the explanation of rates. It is doubtless 
mainly responsible for the difference between the rates on 60-day, 
double-name, choice commercial paper, and those on 60-day loans 
secured by stock-exchange collateral; also for the difference in the 
rates on double- name and single-name commercial paper; but at times 
it is also a factor in individual and general rate movements. Such 
events as proposed and actual changes in the standard of value or 
other elements of the currency, special financial operations of the 
government, wars and rumors of wars, presidential elections, etc., 
change the scope and magnitude of its influence and cause fluctuations 
in rates not warranted by the condition of the reserves or other 
influences. The success of the government loan for the replenishment 
of the gold reserve, in February, 1896, showed itself in a lowering 
of the rates in the call and time markets at a time when the surplus 
reserves were rapidly falling. The presidential election in November 
of the same year, in which the question of the standard of value was at 
stake, raised rates to a great height in the week preceding the election 
and lowered them greatly in the week following, quite regardless of 
the course of the surplus reserves, which in both weeks would have 
warranted movements exactly contrary to those which actually took 
place. The presidential election of igoo also affected the money 
market. The rate on call loans advanced to 25 per cent just before 
the election, and after the result was known the offerings of hoarded 
money were so great as to lower considerably the average rate for 
commercial paper for the week ending November 9, notwithstanding 
the fact that the average of the surplus reserves for that week was 
considerably lower than in the one preceding. During the weeks 
ending April 16 and 23,' 1898, the fluctuations of rates were due to the 
excitement and apprehension caused by the preceding events and the 
outbreak of the Spanish War. Whenever stock-market values are 
fluctuating widely, banks not only demand larger margins and are more 

' The week ending April 16 the average for call loans rose from if to 2 f per cent 
in spite of an increase in the surplus reserves, and the following week both the time 
and commercial-paper rates rose, even though the surplus reserves advanced to a 
considerably higher figure. 



782 MATERIALS FOR ELEMENTARY ECONOMICS 

discriminating in the selection of collateral, but they often also raise 
rates on this class of loans. Every stock-market flurry of the last 
decade furnishes examples. 

Besides the various influences comprehended under the terms 
supply, demand, and risk, it is possible that at times a monopolistic 
element has entered the market. The great height attained by the 
call rate in periods of extreme stringency seems to point to the presence 
of this element. When the majority of the banks have practically 
withdrawn from the market, it is possible for the few individuals, 
corporations, and financial institutions still remaining to resort to a 
close approximation to holdup processes, thus forcing the rate to 
unreasonable heights. 

A further continuation of the analysis of the causes of rate 
movements would unduly extend this article. What has already 
been presented seems adequate support for the following statements: 

1. Fluctuations of rates on the New York market are wide and 
frequent, and tend to become more and more severe. 

2. In a large measure they are due to currency movements, that 
to and from the interior being especially important. 

3. Some of these currency movements occur with a considerable 
degree of regularity and are, therefore, capable of being foreseen and 
provided for; others, and these are frequently very important, are 
very irregular and uncertain and therefore cannot be foreseen and 
provided for. 

4. The influences to which rates are subject are varied and 
numerous. No single one can be regarded as dominant in the sense 
that at all times and normally it overshadows all the others. 

5. Many of these influences are national and even international 
in scope, and therefore justify the application to the New York 
market of the adjective national, and warn against an apparently 
widespread belief that its ups and downs do not concern the entire 
country. 

6. The currency situation revealed by th^ movements outlined and 
illustrated in the preceding pages calls for serious consideration from 
Congress and amply justifies the persistent demand for thoroughgoing 
reform. 



INTEREST 783 

219. CONDITIONS IN THE MONEY MARKET 

The money situation continues remarkably easy in view of the 
comparatively limited reserves held by the banks.' This condition 
may, of course, be ascribed to the absence of demand by new enter- 
prises and to the general slowing down of business resulting from the 
radical reductions that are contemplated in the new tariff schedules. 
Importers are requiring smaller accommodation, there is virtually no 
Stock Exchange speculation of any kind that requires financing, and 
general business seems to be gradually approaching a position where 
it is concerned merely with the day to day requirements of consumers. 

Notwithstanding that $4,000,000 in gold for export must be taken 
into consideration in the money movement of the week, the bank 
statement to be issued after the close of business to-day promises 
to be a fairly favorable one. In the direct movement from the 
interior a net gain of $9,062,000 was shown by the New York banks. 
But from this must be deducted the $4,000,000 and a net loss of 
$387,000 on Sub-Treasury business, which brings the net gain down 
to $4,675,000. 



A rather significant indication of the real condition of the money 
market at present^ is the fact that sixty-day funds are quoted at 
sh @ 3* per cent, while six months are 4! per cent, and still higher 
figures are quoted for more distant maturities. In other words, 
money in New York is apt to continue easy until crop requirements 
become insistent. Then if there should be any improvement in 
trade following the definite promulgation of the tariff and should 
Stock Exchange speculation assume even normal proportions, bankers 
at New York expect that a period of distinct stringency will prevail 
and they are governing their transactions and credit accordingly. 
An equally significant feature in the last few days has been the sale 
in this market of quite large amounts of sterling finance bills. This 
is a form of foreign borrowing and means that foreign funds are being 
loaned here on long term commitments. This, of course, will be a 
counteractive influence of the recent exportation of gold. 

Preliminary estimates in regard to the movements of currency 
this week suggest a gain in cash by the banks of about $5,300,000. 
They received from the interior $19,085,000 and sent to the interior 

' From The Journal of Commerce and Commercial Bulletin, May 17, 1913. 
^ Ibid., May 24, 1913. 



784 



MATERIALS FOR ELEMENTARY ECONOMICS 



$8,293,000, including $4,858,000 national bank notes sent to Washing- 
ton for redemption. The gain from the interior was $10,792,000. 
Gold exports amounted to $2,000,000 in bars to Paris. The ordinary 
disbursements by the Sub-Treasury aggregated $11,343,000. The 
payments by the banks to the Sub-Treasury were $14,779,000, show- 
ing a loss on Sub-Treasury operations proper of $3,436,000. 

Offerings of money on call showed an increase yesterday, which 
was reflected in the fact that renewals were made at 2f per cent, as 
against 2| per cent on the previous day. The extreme quotations 
were 2^ and 3 per cent. The opening and closing figure was 2f per 
cent. 

Time money, however, was firmer for the long periods. All the 
banks and trust companies were insisting on 4^ per cent for five 
months and 4! per cent for six months. 

Commercial paper presented no new feature. Transactions were 
again on a small scale at rates previously current. 

At Boston there was considerable marking down of call money 
rates from 3^ to 3 per cent. 

At Chicago easier money rates are regarded as temporary. Trust 
companies continue to loan on September and October maturities. 
Long-time loans are firm at 5^ to 6 per cent. 

Following are the quotations covering call and time loans and 
commercial paper for the periods named : 



Yesterday 



Last Week 



Last Year 



Call money — 

Renewals 

Range 

Time money — 

Sixty days 

Ninety days 

Four months 

Five months 

Six months 

Commercial paper — ■ 

Choice 6 months names 



sn 

Aid 

aH 



m 

H 
H 

HI 



St@5t 



4 

4 k 
4 ( 
A\k 
\\k 



Hi 
HI 
Hi 
Ui 



si@sl 



3 

3 ( 
3i 
3i( 

3i 



•i3t 



n^ 



3f@4 



INTEREST 785 

220. DIFFERENCES IN RATES OF INTEREST ON PUBLIC 

LOANS 

a) DIFFERENT AVERAGE RATES OF INTEREST ON INDEBTEDNESS OF 

STATES, COUNTIES, AND MINOR CIVIL DIVISIONS BY 

GROUPS OF STATES, 1902' 

Per cent 

Me., N.H., Vt., Mass., R.I., Conn 38 

N.Y., N.J., Pa 40 

Del., Ind., Va., W. Va 4-6 

N.C., S.C, Ga., Fla 5-8 

Ohio, Ind., Ill, Wis., Mich 4-7 

Minn., la., Mo., N.D., S.D., Neb., Kan 5° 

Ky., Tenn., Ala., Miss 51 

La., Ark., I.T., Okla., Tex 4-9 

Mont., Idaho, Wyo., Colo., N.M 5-4 

Ariz., Utah, Nev 6.1 

Wash., Ore., Cal 5 • o 

b) DIFFERENT RATES OF INTEREST ON DEBT OF VARIOUS COUNTRIES' 

Per cent 

Argentina 4-6 

Austria-Hungary 3-5 

Brazil 4-5 

Canada 25-4 

China 4-5 

Ecuador 4-10 

France 25-3 

German Empire 3-4 

Italy ss 

Japan 4-5 

Mexico 3-5 

Netherlands 25-3 

Norway 3-3^ 

Paraguay 3-7 

Russia 3-6 

Siam 4I 

United Kingdom 2§-2| 

United States 2 -4 

' Special Report of the United States Census Ofi&ce, Wealth, Debt, and Taxation 
(1907), p. 143. 

'Statistical Abstract of the United States, 19 12, pp. 804-805. 



786 MATERIALS FOR ELEMENTARY ECONOMICS 

221. TABLE OF BOND VALUES' 

COMPUTED FOR SECURITIES BEARING INTEREST AT 5 PER CENT 
ON PAR VALUE 



Years 

BEFORE 

Matxirity 



3 

4 

S 

6 

7 

8 

9 

10 

II 

12 

13 

14 

IS 
16 
17 
18 
19 
20 

25 

30 

35 
40 
45 
SO 



EqtnvALENT Rate of Return 



4l% 



4i% 



36 



4f% 



4i% 



100. 
100. 
100. 
100. 
100. 
100, 
100. 
100. 
100. 
100. 
loi . 

lOI. 
lOI . 
lOI. 

101. 

lOI. 
lOI. 
lOI. 
lOI. 
lOI. 
lOI. 
lOI. 
102. 

102. 
102. 
102. 



■5% 



100. 

100. 

100. 
100. 
100. 
100. 
100. 
100. 
100. 
100. 
100. 
100. 
100. 
100. 

lOO. 

100. 
100. 

lOO. 

100. 

100. 

100. 
100. 
100. 
100, 
100. 
100. 



Sl% Si% 5f% SJ% Sl% si% Si% 6% 



99-52 
99 07 
98.63 
98.23 
97.84 
97.47 
97 13 
96.80 
96.49 
96.19 
95-91 
95.65 
95.40 
95.16 
94.94 
94.72 
94. 52 
94.33 
94.15 
93.98 
93.25 
92.69 
92.27 
91.95 
91.70 
91.51 



99 



87. 



85.93 



99.04 
98.14 
97.29 
96.49 
95.73 
95. 02 
94.35 
93.72 
93.12 
92.56 
92.03 
91-53 
91 .06 
90.62 
go. 20 
89.81 
89-43 
89.08 
88.75 
88.44 
87.14 
86.16 
85.44 
84.90 
84.50 
84.20 



The figures in this table show, as a percentage of par, the present 
value of any 5 per cent bond, according to (i) the length of time to 
elapse before repayment of the principal, and (2) the equivalent rate 
of net income which the investment is to yield. 

For example, a man wishes to buy in July, 1913, a $1,000 5 per 
cent bond maturing in July, 1932, and wishes to derive from it a net 
income equivalent to 5^ per cent, allowing for the fact that he is to 
receive at the maturity of the bond the full par value, which is more 
than he will now pay for it. In the column headed 5I per cent, the 
figure showing the value 19 years before maturity is 97.02. The 
proper price to pay for the $i,ooo bond is therefore $970. 20. 

' Compiled from more elaborate tables published for the use of bankers and 
investors. 



INTEREST 



787 



222. THE RELATION OF INTEREST-RATES TO RISING 
OR FALLING PRICES^ 

To what extent is appreciation of money balanced by a lower rate 
of interest, or depreciation of money by higher interest ? Only to a 
small degree. So largely is the dollar looked upon as a settled and 
unchangeable standard, so little is its variability in purchasing power 
practically considered, despite plentiful evidence of this variability, 
that the adjustment of interest rates to the changing value of money 
seems almost negligible. The difficulty is the greater, because, even 
when all these possibilities are borne in mind, we cannot be abso- 
lutely certain how or to what extent money will change in value over 
either a long or a short future period. We may expect, for instance, 
a continued depreciation, but we cannot be sure of it or of its extent 
and continuance. 

In The Rate of Interest, Professor Fisher has set forth numerous 
statistical data which seem to show, in the aggregate, some tendency 
toward adjustment of interest to price changes. If money is depre- 
ciating there is some tendency for interest to rise, and if it is appre- 
ciating, for it to fall. But this rule, if true for a majority of cases, is 
also subject to numerous exceptions. And even when there is adjust- 
ment, it is exceedingly slight. The following figures (from Irving 
Fisher's The Rate of Interest, brought down through 1910 by compila- 
tions from the Financial Review and the Economist), giving interest 
rates, appreciation and depreciation of money, and virtual interest 
(i.e., interest realized in actual purchasing power), show to how small 

New York Rates of Interest in Relation to Rising and Falling Prices. 
Taken from Prime Two-Name 6o-Day and qo-Day Paper 



Years 



Per Cent 
Interest 



Per Cent 

Appreciation (+) 

or Depreciation ( — ) 

of Money 



Per Cent 
Virtual Interest 



1875-1879 
1880-1884 
1885-1891 
I 89 2-1 89 7 
I 898- I 906 
1907-1910 

1875-1896 
1897-1910 



+ 7-9 
-i-o.6 
— o. 2 
+5-6 
-35 
—0.5 

-\-2.6 
-2.4 



+ 130 
-I- 6.0 

+ 4-9 
-I-10.2 

+ I.I 
+ 4-4 

+ 7-7 
-f- 2.2 



' From Harry G. Brown, "Rising Prices and Investments," in How to Invest 
When Prices are Rising, pp. 41-43. G. Lynn Sumner & Co., 1912. 



788 



MATERIALS FOR ELEMENTARY ECONOMICS 



Bank of England Rates of Interest in Relation to Rising 
AND Falling Prices 



Years 



Per Cent 
Interest 



Per Cent 

Appreciation ( + ) 

or Depreciation ( — ) 

of Money 



Per Cent 
Virtual Interest 



1874-1879 
I 880-1 88 7 
I 888-1 890 
1891-1896 
I 89 7-1 900 
1901-1906 
1907-1910 

1897-1910 



+4.3 
+3-8 
-1.4 
+3-4 
-6.6 

-1-5 
-0.9 

-1.6 



+ 7 
+ 7 
+ 2 
+5 
-3 
+ 2 
+2 

+ 1 



a degree money rates of interest change and how great, therefore, are 
the differences realized in virtual interest when prices are rising and 
when they are falling. 



223. THE THEORY OF BOND VALUES DURING A 
RISING-PRICE ERA^ 

A bond has been well defined as "a, promise to pay a definite sum 
of money at a definite future date, with interest at a fixed rate payable 
at stated intervals in the meantime." The italics indicate the signifi- 
cant things for our immediate consideration. What we seek to 
know is the effect of rising prices upon fixed sums of money due in 
the future. An illustration will show this effect most clearly. 

Suppose that an investor pays par value for a $1,000 bond bear- 
ing 4 per cent interest. If during the following year prices rise 2^ 
per cent (about the actual compounding annual average rise for the 
past 15 years) the investor must have $1,025 at the end of the year 
to have the same purchasing power which his $1,000 represented at 
the beginning of the year. But, supposing that, at the end of the 
year, he can still get $1,000 for his bond, he will then have $1,040, 
principal and interest. This is $40 more money, but only $15 more 
purchasing power than he had at the beginning of the year. And this 
$15 will not buy so much as $15 would have bought then! Further- 
more he probably could not get the full $1,000 for his bond. Allow- 
ing, then, for his loss in purchasing power as to both principal and 

I From Walter E. Clark, "Bonds as an Investment When Prices are Rising," 
in How to Invest When Prices are Rising, pp. 60-62. G. Lynn Sumner & Co., 1912. 



INTEREST 789 

interest, he has received less than i\ per cent, instead of 4 per cent, on 
his invested capital. 

This simple illustration tells the whole story. The principle 
involved is that a general rise in prices lowers the real income of those 
whose income in dollars and cents is fixed. It must be emphasized 
that this principle applies as much to the whole sum paid in the 
redemption of a bond, at maturity, as it does to the periodic sums 
paid in interest. Both kinds of payments are fixed sums and there- 
fore have decreasing purchasing powers as the years of a rising-price 
era pass. 



XVIII. PROFITS 

224. WALKER'S THEORY OF PROFITS^ 

I shall now undertake to show that profits, the remuneration of 
the entrepreneur or employer, partake largely of the nature of rent, 
being a species of the same genus. So far as this is the case, profits 
do not form a part of the price of the products of industry, and do not 
cause any diminution of the wages of labor. 

The successful conduct of business, under free and active com- 
petition, is due to exceptional abilities, or to exceptional opportunities. 
Whether due to exceptional abilities or to exceptional opportunities, 
my proposition could be equally well established, just as it makes no 
difference in the theory of rent whether a piece of land owes its superior 
advantages for the purposes of cultivation to higher natural fertihty, 
or to closer proximity to the market to be supplied. Yet it can 
not be a matter of indifference to social philosophy, whether the 
power to command profits be due to exceptional abilities or to excep- 
tional opportunities; and I may, therefore, be pardoned for pausing 
to point out that the former are far more efficient than the latter, 
in securing profits. 

To justify this assertion it will be enough to refer to the well- 
known fact that a great majority of all business houses which have 
achieved notable success have been founded by men who owed almost 
nothing to opportunity. On the other hand, nothing is more familiar 
than the spectacle of great houses, deeply founded, which have enjoyed 
high prestige, wide connections and large accumulated capital, dwin- 
dling away little by little, if not brought abruptly to their downfall, 
under the successors of the original founder, simply because the 
management which had been strong, and brave, and wise, became 
commonplace, purposeless, timid, and weak. All this is so familiar 
that I do not fear that any American, at least, will question the asser- 
tion that exceptional abilities have far more to do with the successful 
conduct of business, than exceptional opportunities. 

Inasmuch as it would make no difference whether profits were 
due to exceptional abilities or to exceptional opportunities, while the 

' From Francis A. Walker, Political Economy (advanced course), pp. 236-41 
Henry Holt & Co., 1888. 

790 



PROFITS 791 

former are, in fact, much the more important factor in the successful 
conduct of business, I shall, hereafter, for convenience and simplicity, 
speak of profits as due to exceptional abilities, just as in discussing 
the question of the use of the land, we speak of rent as due to dif- 
ferences in fertility, assuming, for convenience of illustration, all the 
fields under view to be in equal proximity to the market. 

If (i) the number of men of exceptional abilities were sufficient or 
more than sufficient to do all the business that required to be done, 
of all sorts and in all places; if (2) these men, however much sur- 
passing all other members of the industrial society, were among them- 
selves equal in all respects which concern the conduct of business; 
and if (3) this class, so constituted and so endowed, were distinguished 
from all not of their class so clearly and conspicuously that no one 
having these exceptional abilities should fail to be recognized, and no 
one lacking such abilities in the full measure should esteem himself 
capable of conducting business, or be so esteemed, for the purpose of 
obtaining credit, we should have a situation closely analogous to 
that which [would be presented by] the case of a community near 
which was found an amount of good land, of uniform quality, ade- 
quate, or more than adequate, to raise all produce required for the 
support of the community. 

The result would be, either [i] that this class would, by forming 
a combination and scrupulously adhering to its terms and its spirit, 
create and maintain a monopoly price for their services in conducting 
the business requiring to be done, which is so improbable as to be 
altogether out of our contemplation, or [2] they would, by competing 
among themselves for the amount of business, bring down its rate 
to so low a point that the remuneration of each and every one of this 
class would be practically equal to what he would receive if employed 
by another. This, which we might call the "no-profits" stage of 
industrial society, corresponds closely to the "no-rent" stage in the 
cultivation of the soil. The persons remaining in the conduct of 
business would earn their necessary subsistence, but no more. Eco- 
nomically it would make no difference to them whether they did this 
as employers or employed. 

In fact, however, the qualifications for the conduct of business 
are not equal throughout all of a sufficiently numerous class. On the 
contrary, the range of ability is almost world-wide. First, we have 
those rarely-gifted persons who, in common phrase, seem to turn 
every thing they touch into gold; whose commercial dealings have 



792 MATERIALS FOR ELEMENTARY ECONOMICS 

the air of magic; who have such insight as almost to seem to have 
foresight; who are so resolute and firm in temper that apprehension 
and alarms and repeated shocks of disaster never cause them to relax 
their hold or change their course; who have such command over 
men that all with whom they have to do acquire vigor from the con- 
tact and work for them as they would not, perhaps could not, work 
for others. 

Next below, though far below, we have that much larger class of 
men of business, of a high order of talent, though without genius 
or any thing savoring of magic, whose unqualified success is easily 
comprehended, even if it can not be imitated: men of natural mastery, 
sagacious, prompt, and resolute. 

Then we have 'the men who, on the whole, do well, or pretty 
well, in business: men who enjoy a harmonious union of all the 
qualities of the entrepreneur, though only in moderate degree, or in 
whom some defect, mental or moral, impairs a higher order of abilities; 
men who are never masters of their fortunes, are never beyond the 
imminence of disaster, and yet, by care and pains and diligence, win 
no small profits from their business, and, if frugality be added to 
their other virtues, accumulate in time large estates. 

Lower down in the industrial order are a multitude of men who 
are found in the control of business enterprises for no good reason: 
men of checkered fortunes, sometimes doing well, but more often 
ill; some of them, perhaps, filling a place that would not otherwise 
be filled, but, more commonly in business because they have forced 
themselves into it under a mistaken idea of their own abilities, perhaps 
encouraged by the partiality of friends who have been willing to place 
in their hands the agencies of production, or intrust them with com- 
mercial or banking capital. The industrial careers of these men are 
not peculiarly happy, though the degree in which they suffer from 
the constant imminence of loss, perhaps of bankruptcy, is very much 
a matter of temperament. Some take it extremely hard, and when 
they fall make no efifort to rise again; others are irrepressible as 
Harlequin, jumping up, alert as ever, after being apparently hanged, 
drawn, and quartered by the common executioner. 

Now, in my view of the question of profits, we find, in the lower 
stratum of the industrial order thus rudely and hastily sketched, a 
"no-profits" class of employers. Notwithstanding all the mag- 
nificent premiums of business success, the men of real business power 
are not so many but that no small part of the posts of industry and 



PROFITS 793 

trade are filled by men inadequately qualified, and who, consequently, 
have a very checkered career and realize for themselves, taking their 
whole lives together, a meager compensation, so meager that, for 
purposes of scientific reasoning, we may treat it as constituting no 
profits at all. Live they do, partly by legitimate toll upon the business 
that passes through their hands, partly at the cost of their creditors, 
with whom they make frequent compositions, partly at the expense 
of friends, or by the sacrifice of inherited means. This bare sub- 
sistence, obtained through so much of hard work, of anxiety, and 
often of humiliation, we regard as that minimum which, in economics, 
we can treat as nil. From this low point upwards, we measure 
profits. 

If this view of the employing class be correctly taken, it appears 
that, under perfect competition, that is, where the conditions of a 
good market are supplied, manufacturing profits, for instance, are 
not obtained through any deduction from the wages of mechanical 
labor; and, secondly, manufacturing profits do not constitute a part 
of the price of manufactured goods. All profits are drawn from a 
body of wealth which is created' by the exceptional abilities (or 
opportunities) of those employers who receive profits, measured 
from the level of those employers who receive no profits, just as all 
rents are drawn from a body of wealth, which is created by the 
exceptional fertility (or facilities for transportation of produce) of 
the rent-lands, measured from the level of the no-rent lands. 

The price of manufactured goods of any particular description 
is determined by the cost of production of that portion of the supply 
which is produced at the greatest disadvantage. If the demand 
for such goods is so great as to require a certain amount to be produced 
under the management and control of persons whose efficiency in 
organizing and supervising the forces of labor and capital is small, 
the cost of production of that portion of the stock will be large, and 
the price will be correspondingly high, yet, high as it is, it will not 
be high enough to yield to the employers of this grade any more than 
that scant and difficult subsistence which we have taken as the no- 
profits line. 

The price at which these goods are to be sold, however, will 
determine the price of the whole supply, since, in any one market, 

' Professor Alfred Marshall says: "The earnings of management of a manu- 
facturer represent the value of the addition which his work makes to the total 
produce of capital and industry." 



794 MATERIALS FOR ELEMENTARY ECONOMICS 

at any one time, there is but one price for different portions of the 
same commodity. Hence, whatever the cost of production of those 
portions of the supply which are produced by employers of a higher 
industrial grade, they will command the same price as those portions 
which are produced at the greatest disadvantage. The difference, 
so measured, will go as profits to each individual employer, according 
to his own success in production. 

Do profits, then, come out of wages ? Not at all. The employers 
of the lowest industrial grade — the no-profits employers, as we have 
called them — must pay wages sufficient to hire laborers to work 
under their direction. These wages constitute an essentia,l part of 
the cost, to the employer, of the production of the goods. The fact 
that these wages are so high is the reason why these employers are 
unable (their skill and power in organizing and energizing labor and 
capital being no greater than they are), to realize any profits for 
themselves. 

The employers of the higher industrial grades will pay the same 
wages to their laborers. Why, in equity or in economics, should a 
laborer who works for a strong, prudent and skillful master, receive 
higher wages than one whose fortune it is to work for a vacillating, 
weak or reckless employer? The one laborer is as efficient as the 
other, and works as hard. The difference in production, which, in 
the one case allows rent to be paid, and in the other enables this 
employer to secure, a profit, is due to no superiority in the quality 
of the labor or the capital employed, over that of the labor and the 
capital employed where no rents or no profits are realized. In the 
one case it is due to the superior fertility of the land, or its greater 
facilities for the transportation of produce; in the other, to the 
superior abilities or opportunities of him who conducts industry. 

In the latter case, the employer, paying wages at the same rate 
to his laborers, and interest, at the same rate, to the capitalist, for 
so much as he has to borrow, and selling his goods, so far as they are 
of equal quality, at the same price as the employer who makes no 
profits, is yet able to accumulate a clear surplus after all obligations 
are discharged, which surplus is called profits. This is effected by 
his careful study of the sources of his materials; by his comprehen- 
sion of the demands of the market; by his steadiness and self-control 
in the presence of temptations to extravagance or wild ventures; 
by his organizing force and administrative ability; by his energy, 
economy, and prudence. 



PROFITS 795 

225. THE RISK THEORY OF PROFITS^ 

If science is to justify the popular conception of profit as funda- 
mentally distinct from other kinds of income, it must do so by point- 
ing to something the undertaker does for pay which is rewarded by 
neither wages, nor interest, nor rent. Just such a peculiar industrial 
function of the undertaker is found in his being the person who 
relieves others of risk. He it is who bargains with the laborer for 
the use of his personal efforts, with the landlord for the use of his 
land, and with the capitalist for the use of his wealth. To all these 
classes of economic persons he makes over, or engages to make over, 
a definite sum of value or power to purchase, and takes the chance 
of recouping himself out of the proceeds of the product when sold. 
In doing these things, he evidently renders to each class a service 
similar to that rendered by an assurance company when it insures 
us against death, accident, or loss of property. Why should the 
undertaker do this? What is his inducement? According to the 
view of his income held by Professor Bohm-Bawerk, these risks are 
assumed for nothing. Sometimes he will sell his goods for more and 
sometimes for less; but, on the average, the undertaker will get 
back, in our author's opinion, just what he has paid to the laborer, 
the landlord, and the capitalist, plus his own wages of management. 
In other words, all he secures for himself is the job of "bossing" the 
affair. Now, it is always pleasant to feel one's self master; but this 
salve to vanity would hardly serve as a sufficient inducement to 
practical men of business. Neither is it true that by working for 
others they could not obtain wages, or a salary, very nearly, or fully, 
as large as what their personal efforts are worth in the conduct of 
their own business. Indeed, it often happens that they think so 
little of their own personal efficiency as managers, that they hire 
other men to conduct their business, or part of it, for them. But, 
even if it be granted that the undertaker can give himself a little 
better job than he could obtain elsewhere, will any such small advan- 
tage afford a sufficient inducement for undertaking the risks of busi- 
ness ? The supposition is manifestly absurd. But some such induce- 
ment must exist, as the element of risk is inseparable from nearly all 
industrial activity. Except in the rendering of some personal services, 
in which production and consumption are simultaneous, and in which 

'Adapted from Frederick B. Hawley, "The Fundamental Error of 'Kapital 
und Kapitalzins, " in The Quarterly Journal of Economics, VI, 283-85 (April, 1892). 



796 MATERIALS FOR ELEMENTARY ECONOMICS 

the producer and the consumer deal directly with each other, and in 
which, therefore, no element of profit appears, there cannot be any 
creation of value from which the element of risk is wholly absent. 
And in the end, and on the average, the final consumers of the product 
must pay in enhanced price the remuneration for the risk the pro- 
ducer takes upon himself. 

There is, then, in all industrial undertakings in which capital is 
engaged, and in some also in which capital is not engaged, an element 
of risk which the final consumer has to pay for. And the reason is 
this: that everybody except the gambler — everybody, that is, engaged 
in industry — prefers a certainty to an uncertainty. To be relieved 
of a risk, we are all willing to pay more than the risk, calculated on 
the doctrine of chances, is worth. 

226. CLASSES OF RISKS TO CAPITAL' 

For theoretical purposes the most significant classification of 
economic risks to capital is the division into static and dynamic 
risks. Static risks are those which are inseparable from any form of 
economic activity, and which will therefore be present in a stationary 
society as much as in one that is either progressive or retrogressive. 

They are connected with losses caused by the irregular action of 
the forces of nature or the mistakes and misdeeds of human beings. 
According to the occasion of the loss, they may be further subdivided. 
Some are caused by inanimate forces, as fire, wind, or water; others 
by the action of animal or plant life, as moth or mold; others by 
the carelessness either of the owner of the wealth destroyed or of 
another person, which gives opportunity for the unfavorable action 
of animate or inanimate nature; and still others by the fraud or 
violence of the criminally disposed, seeking to appropriate to their 
own use wealth which does not belong to them. All these forms of 
loss will continue while human life endures, and uncertainty as to the 
exact time or amount of loss to be anticipated from these sources 
involves also the existence of static risk. 

Dynamic risks are those involved in the possibility of dynamic 
changes. Not all dynamic changes, however, are equally important 
in this connection; for it is not the change itself which constitutes 

' Adapted from Allan H. Willett, The Economic Theory of Risk and Insurance, 
pp. 39-43, 48. Columbia University Studies in History, Economics, and Public 
Law, Vol. XIV (1901). 



PROFITS 797 

the risk, but the uncertainty about the time or amount of future 
changes. Growth of population and increase of capital take place 
with comparative regularity, and therefore cause little incidental 
loss, except in so far as they may be necessary to one of the other 
dynamic changes, and pave the way for it. It is with changes in 
human wants, and still more with improvements in machinery and 
organization, that the greatest amount of uncertainty is connected. 
Those included in the first of these groups originate on the side of 
consumption; those in the second, on that of production. To some 
extent the former are capable of being anticipated or even controlled, 
while the latter occur in the most irregular and uncertain ways, and 
to that extent there is greater risk connected with the latter than with 
the former. No one thing is more essential for success in modern 
business than the ability to forecast future changes in the desires of 
consumers. It is important to note also that the loss may result 
from the non-occurrence of an anticipated event, as well as from the 
occurrence of one which was not anticipated; and that the special 
cost entailed upon society by the existence of risk will have to be 
borne whether or not the uncertain loss actually occurs. 

Examples of the losses caused by these dynamic changes are to 
be found on every hand. The tide of fashionable travel turns from 
seashore to mountains, and large investments of capital at ocean 
resorts lose their value. Bicycles and automobiles are used by people 
who formerly wanted horses and carriages, and the value of the latter 
declines. An unexpected change in the fashionable color leaves 
manufacturers and dealers with stocks of goods which they are obliged 
to sell at reduced prices. The effect of improvements in mechanical 
and chemical appliances is equally obvious. A system of street rail- 
ways operated by cable was introduced in a western city, and when 
its career of usefulness had hardly begun, it was replaced at great 
expense by a system operated by electricity. A flouring mill was 
fitted up with the best available machinery, and within a very short 
time the new machinery was discarded, and an improved pattern 
introduced at an expense of hundreds of thousands of dollars. Every 
investment of capital in forms whose usefulness is limited to the 
production of a specific commodity, is exposed to the danger of losing 
its value through discoveries or inventions which render it obsolete 
and useless. 

There is a special form of dynamic risk which needs to be pointed 
out, both on account of the large part it plays in modern industrial 



798 MATERIALS FOR ELEMENTARY ECONOMICS 

life and because of its great theoretical importance. In a state of 
society like the present, in which wealth is increasing at a rate out 
of proportion to the increase in population, there is always a large 
fund of newly created capital looking for favorable investment. This 
must be used either in increasing the supply of existing consumption 
goods or in creating kinds not before produced. These results may 
be reached either through the larger employment of the kinds of 
capital goods already in use, or through the creation of new kinds 
adapted to the production of the old or the new consumption goods. 
If the only investment for the new capital were to be found in the 
creation of consumption goods already in use, by methods and 
machinery now employed, the rate of interest would rapidly fall, 
and there would be little opportunity for the realization of profit. 
To avoid this result capital is continually seeking new forms of invest- 
ment. The simplest device is to invent a cheaper method of creating 
a commodity already in use. Every improvement of this kind will 
yield a temporary profit to the entrepreneur who first employs it, but 
in the end it must result in a lower rate of interest on all capital. As 
a second resource additional capital goods of forms already employed 
may be used to create new kinds of consumption goods; or, finally, 
the new capital may be embodied in new kinds of capital goods, 
intended for the production of consumption goods not before created. 
If the new consumption good produced in either way is one which 
men desire, so that as a result of its production there is a net increase 
in the sum of human wants, its influence will be felt in the direction 
of a greater willingness of men to labor, a consequent greater demand 
for capital, and a retardation in the fall in the rate of interest. The 
introduction of the new goods and new machinery also offers an oppor- 
tunity for the realization of temporary profit by those who first 
produce or use them. 

The relation of risk to these different forms of investment of new 
capital is readily seen. In the first case no uncertainty is involved, 
except possibly as to the elasticity of the demand for the commodity 
whose production is increased. In the second case there is to be 
added uncertainty as to the technical result, a form of uncertainty 
which is usually connected to a greater or less extent with the intro- 
duction of any untried appliance or process. With the progress of 
physical science, however, it is evident that this form of uncertainty 
is being gradually eliminated, and that in many cases the successful 
working of the new device can be safely counted upon in advance. 



PROFITS 799 

There is still greater uncertainty involved in the creation of new com- 
modities and new machinery for producing them. If the new com- 
modity is intended to satisfy an existing need, it may be uncertain 
how far it will accomplish its purpose. The claim that it meets a 
long felt want is hardly sufficient to assure its success. If, on the 
other hand, the commodity precedes the want, and is produced with 
the expectation that its own intrinsic merits and extensive advertising 
will create a market for it, the possibility of failure is evidently greatly 
increased. Finally, if existing kinds of capital goods are used in 
producing a new commodity which fails to find a sale, they can be 
turned to the employment for which similar machines had been used 
before and thus preserve a part of their value; but if new kinds of 
machines have to be brought into service, besides the element of 
uncertainty as to the technical success of the machine, there is a 
possibility that the entire investment will be lost if the commodity 
falls dead on the market. 

The investment of capital in attempts to produce new com- 
modities which shall find a ready sale is one of the most characteristic 
features of modern industrial life. The rapid accumulation of capital, 
the consequent fall of the rate of interest in old forms of investment, 
and the large gains to be realized under our patent system by the 
creation of a new commodity which appeals to the public taste, 
combine to push production out tentatively in all directions. Large 
amounts of capital are sunk every year in experiments which end 
disastrously, and large fortunes are made out of successful ventures. 
In order to be able to refer without circumlocution to the risk involved 
in these experiments, it seems best to give it a separate name. For 
lack of a better term let us call it developmental risk. By that term 
will be meant the uncertainty as to the return to be realized from the 
investment of capital in the production of a new commodity or of a 
new capital good, due to the possibility that it may not find the 
expected market, or may not perform the work for which it was 
intended. 

227. THE CLASSES OF RISK-TAKERS' 

We have now, I think, attained a position from which we can 
clearly discriminate between the three classes of risk-takers — enter- 
prisers, speculators, and gamblers. All of them are actuated by the 

' From Frederick B. Hawley, " Enterprise and Profit," in The Quarterly Journal 
oj Economics, XV, 103-4 (November, 1900). 



8oo MATERIALS FOR ELEMENTARY ECONOMICS 

hope of gain, but differ in their grounds for expecting or hoping for 
gain. The entrepreneur, who is only the assumer of industrial or 
productive risks, when considering a risk, computes as well as he can 
the actual probability of loss. He then forms a subjective valuation 
of the risk, which is, of course, considerably greater than the actual 
risk. The difference between his actuarial and his subjective valua- 
tion serves as the minimum limit of the expectation of profit which 
will induce him to assume the risk. He then secures from the person 
who will be relieved by hi^s assumption of the risk as much as he can 
for assuming it, the maximum limit being, of course, that person's 
subjective valuation of the risk, which must in all cases be greater 
than his own, or no transaction results. The competition of enter- 
prisers among themselves results, of course, usually in the enterpriser 
getting but little more than his own subjective valuation; but a little 
more he does always get in the long run. The essential point, however 
is that the enterpriser performs a service for which he expects to receive 
a reward — necessarily, from the circumstances of the case, uncertain 
in its amount, or, in other words, a true residue. 

The speculator, on the other hand, does not render, or rather does 
not mean to render, any service to anybody. The fact that a specu- 
lator on the Cotton or Produce Exchange does render a service to 
society through the party he relieves of the risk is, as we have seen, 
only incidental. The speculator on the Stock Exchange, whose 
operations are otherwise similar to his relieves no one of the risk of 
what the selling price of the product will be, as the subject matter of 
his speculations is not products but aggregations of capital that pro- 
duce products. All that the pure speculator has in mind, when he 
assumes a risk, is to back his own opinion. He believes that the 
common judgment of the trade about the real value of cotton or 
wheat or stocks, as expressed in the prices ruling on the exchange, is 
wrong, just as he may believe that a certain horse may have a better 
chance to win a race than is expressed by the going odds. Some of 
these men are correct in their estimate of themselves: their judgment 
of cotton, wheat, stocks, or horses, is better than that of the average 
man venturing in these matters. These men win largely and steadily, 
but it is only because they excel their fellow-speculators. If the 
average was raised to their level, they would have no advantage in 
speculation; and they would cease to win with any approach to regu- 
larity, and in the long run would neither gain nor lose by their ven- 
tures. Speculation is, therefore, merely a distributive force, and 



PROFITS So I 

cannot be brought by analysis within theories of the productive 
forces. 

The case of the gambler differs from that of the speculator only 
in this: that his subjective valuation of a risk is a negative quantity. 
The excitement of risk makes it, to the gambler, a good in itself, so 
that, when he believes the chance of winning or losing to be even, he 
likes to take the chance when opportunity offers; and when he cannot 
find an even chance to bet on, without putting himself to too much 
trouble, he will play faro or some similar game in which he knows that 
the chances are against him. 

228. HEDGING AS AN INSURANCE AGAINST RISK' 

Not only is future trading, in the absence of definite knowledge by 
both parties that there is a mutual intention to gamble, sanctioned by 
the law, but it is an important fact that, notwithstanding the enor- 
mous amount of purely speculative operations upon leading cotton 
exchanges, the future trading system is very extensively used to 
facilitate transactions in the actual staple, and for the purpose, not 
of speculation, but in large measure of avoiding speculation. 

This employment of the future system, which is technically known 
as "hedging," is an exceedingly important feature of modern trading 
in cotton, and, unquestionably, an extremely valuable one. In sub- 
stance the process of hedging is as follows : A cotton merchant in the 
South contracts by private arrangement outside of the exchange, say, 
in July, when the old crop is practically exhausted and before the new- 
crop has matured, to deliver to a spinner, say, in New England or in 
Liverpool, 10,000 bales of cotton in the following January at a fixed 
price. At the time of making this agreement he has no cotton in his 
possession and has no means of immediately obtaining it in the market. 
Suppose the price stipulated is 8 cents a pound, this figure representing 
the price at which the merchant expects to be able to buy the cotton, 
plus an allowance for his expenses and profit on the transaction. If 
subsequently, owing to early frosts, serious storm damage, or any one 
of a number of causes, the price of cotton advances to 10 cents a 
pound, the seller of this cotton is obviously confronted with a heavy 
loss, since he must go into the market and buy the actual cotton at 

' Adapted from the Report of the Commissioner of Corporations on Cotton 
Exchanges, Part I (1908), pp. 48-54. 

[See also Selection 100: "Organized Exchanges: Futures, Puts, and Calls," 
and Selection 106: "Organized Speculation and Its Regulation."— Editors.] 



8o2 MATERIALS FOR ELEMENTARY ECONOMICS 

the advanced price. Under the future system this loss may be very 
largely avoided by hedging. To escape such loss the seller of the 
10,000 bales of cotton, immediately on entering into his agreement, 
buys on the exchange a corresponding amount of future contracts for 
cotton deliverable in January." For these contracts let it be assumed 
that he has paid 7I cents per pound, or a half cent under the price at 
which he has undertaken to deliver cotton in January. This is a 
reasonable assumption; in fact, in actual practice it is the custom for 
such sellers of cotton to calculate the number of points (hundredths of 
a cent) necessary to cover their expenses and allow them a profit, and 
then to agree to deliver cotton to spinners at such number of points 
above the current price of some future delivery; that is to say, if in 
July exchange contracts for January delivery are selling at 7§ cents^ a 
cotton merchant would reckon the number of points necessary to cover 
his expenses and profit, and then agree to deliver the cotton to a 
spinner at this number of points above, or, to use the trade expression, 
"on" the current price of January contracts.^ In the case assumed it 
may be considered that the margin thus allowed is a half -cent. The 
merchant has, then, bought future contracts for 10,000 bales of 
cotton at 7I cents, and has agreed to sell a corresponding quantity 
of cotton to a spinner at 8 cents, the margin of one-half cent being 
intended to cover his expenses and leave him a profit. If this margin 
IS maintained intact he is satisfied. Suppose that the price of cotton 
in the spot market advances sharply to 10 cents before he has pur- 
chased the 10,000 bales which he has agreed to deliver to the spinner 
at 8 cents. Theoretically, the merchant could protect himself by 
simply holding his future contract until January and then take up the 
cotton upon it and in turn deliver this cotton to the spinner. In 
practice, however, owing to the fact that such agreements with 
spinners are usually for specified grades, while future contracts on 
exchanges are not, the merchant does not ordinarily take up cotton on 
his future contract; instead, he goes into the spot market and buys 
cotton necessary to meet his engagements with the spinner, paying 
therefor the advanced price, which in the case assumed would be 10 
cents. This cotton he must deliver to the spinner at 8 cents; conse- 

' In hedging it is not imperative that contracts be bought which mature in the 
same month that the actual cotton is deliverable, but this is very frequently done, 

^ It will be understood that prices quoted in connection with such contracts 
are invariably prices per pound. 

s Allowance must also be made for differences in the value of various grades of 
cotton. 



PROFITS 803 

quently he has suffered a loss. But in the meantime, under a normal 
working of the future system, his January future contract which he 
bought on the exchange at 7^ cents should have likewise advanced by 
substantially the same amount, or to 9^ cents. He sells out his future 
contract, therefore, at a profit sufficient to offset the loss suffered on 
his transaction in spot cotton. Even if it be assumed that he receive 
cotton on his future contract instead of selling that contract out, he 
should nevertheless be able to sell this cotton in the spot market at a 
corresponding profit, which would offset his loss on spot cotton 
purchased. In other words, his margin of profit remains intact and 
his loss on the actual cotton is covered by the profit on his future 
transaction. If, on the other hand, the price of cotton in the open 
market goes down, it is to be expected that the price of future con- 
tracts on the exchange will go down in sympathy. In this case he 
will sell out his future contract at a loss, but, on the other hand, he 
should be able to buy his actual cotton in the spot market at a cor- 
respondingly lower price than he had originally calculated, so that his 
profit on this spot transaction will counterbalance his loss on his 
operation in futures.^ 

In the cases described the hedging process was resorted to to pro- 
tect a merchant who had sold cotton ahead at a time when it was not 
actually obtainable in the spot market. The future system may be 
used in a similar manner to protect a merchant who has accumulated 
a stock of cotton for which he does not have an immediate demand. 
Assume, for instance, that a large cotton merchant in the South is 
compelled to take cotton from growers at the beginning of the crop 
year in very large quantities, and much faster than he can dispose of 
it to spinners. This is, in fact, a very common occurrence in actual 
practice. Obviously, as his stock accumulates he is liable to lose 
heavily in case the price of cotton declines. To protect himself he 
again resorts to the future market. In this case, however, instead of 
buying future contracts he sells them short. Thus, if he finds in 
September that he has 10,000 bales of cotton on hand for which he 
has paid 8 cents, he sells a corresponding number of contracts for 
delivery, say, in January, at, say, 8| cents.^ If owing to an enormous 

' This statement is a general one and subject to modification owing to the fact 
that prices of all grades of cotton do not fluctuate in equal amount. 

^ Owing to the expense of carrying cotton a merchant should, unless a decline 
in the market is anticipated, be able to sell a distant contract at a premium above 
the current price. This is, however, by no means invariably the case. 



* 
8o4 MATERIALS FOR ELEMENTARY ECONOMICS 

crop or a poor demand the price of cotton in the open market goes 
down, his hedge affords him a double protection. In the first place 
he can simply hold his cotton and when his future contracts mature 
deliver it upon them, in which case he will, of course, obtain not the 
reduced price prevailing at the time the cotton is actually delivered 
but the price at which he actually sold these contracts, namely, 8| 
cents.* 

In practice, however, the merchant does not usually thus deliver 
his stock of cotton in fulfillment of future contracts thus sold, but as 
the season advances he sells out his actual cotton even though at a 
lower price. Let it be assumed in the case under consideration that 
he sells his stock of 10,000 bales at 7 cents, or at i cent less than it 
originally cost him ; he has then lost i cent a pound, not taking into 
account carrying charges which have accrued in the meantime. To 
offset this loss he should be able to buy future contracts on the 
exchange for 10,000 bales against those which he had sold in September 
at 8^ cents, obtainmg these at a corresponding decline of i cent, or, 
say, 'j^ cents. The contract thus purchased will, of course, offset the 
contract previously sold. In other words, against a loss of i cent on 
his spot transaction he has made a profit of i cent on his transaction 
in futures, so that the margin of one-half cent which he allowed to 
cover expenses and profit again remains undisturbed. 

In ordinary business such a merchant, instead of selling out all his 
stock of cotton at one time and at one price, disposes of it in parcels at 
varying prices; but as fast as he sells a given quantity, say, 1,000 
bales of his actual cotton, he at once buys future contracts for a like 
amount on the exchange at corresponding prices so that when his 
actual cotton is all sold he has "bought in" sufficient future contracts 
to offset or "cover" those previously sold. 

The opportunity for using the future market for hedging purposes 
is also open to the sj^inner. Take the case of a spinner who requires 
10,000 bales of cotton for his season's operations, and who, at the 
beginning of the cotton year, has outstanding no contracts for the sale 
of his manufactured goods. If he were to buy his entire 10,000 bales 
of cotton or the bulk of it at once and store it, while competitors were 
to buy only from day to day, a sharp decline in the price of cotton 
would leave him with a relatively high manufacturing cost for his 
finished product, which he would consequently be able to dispose of, 

■ The value may, however, be affected by changes in the values of various 
grades relatively to the basis grade, that is, middling. 



PROFITS 805 

in competition with those spinners who had postponed their purchases 
of raw material until the decline, only at a loss or at a reduced profit. 
Under the future system, such a spinner, having bought his 10,000 
bales of actual cotton, could protect himself by immediately going into 
the future market and selling a corresponding quantity of future 
contracts. If the price of cotton goes down, the loss on his stock 
should be made good by his ability to buy in future contracts at a 
corresponding decline against those which he previously sold short. 
As fast as he works up a given quantity of his stock of cotton into 
manufactured goods, he buys in a corresponding number of future 
contracts. 

The hedging system is used in a somewhat different way in the 
case of a manufacturer of cotton goods who has sold his product 
under contract for forward delivery, but who has not purchased a 
supply of raw material. In this case a decline in the price of cotton 
is obviously to his advantage. On the other hand, a sharp advance in 
the price of cotton, after he has agreed to deliver the manufactured 
goods at a fixed price, as obviously tends to reduce his profits, or per- 
haps to result in loss. Such a manufacturer would protect himself 
by buying a sufficient number of contracts in the future market at the 
time he sells his goods to cover his prospective needs. If the price of 
cotton goes up before he has completed his contracts for the delivery 
of cotton goods, his loss on actual cotton is presumably covered by a 
profit on the futures so purchased; whereas, if the price declines, the 
loss on his future contracts is correspondingly covered by his saving 
on purchases of the actual staple. As already pointed out, the manu- 
facturer seldom obtains his cotton by accepting it as a delivery on 
the contracts so purchased. 

The protection thus afforded by the hedging system is far-reaching. 
Not only may the system be used, in the manner indicated, by the 
cotton merchant and the spinner to protect themselves against 
fluctuations in the price of cotton, but it may be used by spinners, or, 
for that matter, by dealers in cotton goods, in a similar way, to protect 
themselves against fluctuations in the price of the manufactured 
product. Suppose, for instance, that a spinner or a wholesale mer- 
chant finds that he is carrying a heavy stock of cotton goods at a time 
when the trade outlook, for one reason or another, is unfavorable, the 
demand has slackened, and a decline in prices is imminent. Without 
the future system, the owner of such a stock of goods would be forced 
either to sacrifice them at the decline or to carry them for an indefinite 



8o6 MATERIALS FOR ELEMENTARY ECONOMICS 

period in the hope of a subsequent revival in demand, in which case 
it would be extremely uncertain whether such a subsequent advance 
would cover the heavy expenses, such as interest, storage, etc., which 
necessarily accompany any such carrying of the stock. Under the 
future system he can to a large extent avoid either of these prospec- 
tive losses by selling future contracts in cotton against his stock of 
manufactured goods. The actual number of cotton contracts thus 
sold is usually based upon the weight of cotton required to make a 
given quantity of goods, which, of course, would vary with the char- 
acter of the latter. If the owner of such a stock of cotton goods finds 
that his fears of a decline in the value of his manufactured product 
are realized, it is reasonably certain that the value of cotton — since it 
is practically the only raw material used in the manufacture of these 
goods — will decline in fairly close correspondence, in which case the 
price of future contracts should also decline in sympathy with the 
staple. In this way, his loss on the goods is largely counterbalanced 
by his profit on the sale of cotton contracts.^ 

It is apparent from even the brief illustrations given that a prop- 
erly conducted future system, through this opportunity for hedging, 
affords a great protection to the most legitimate sort of business and 
one of almost incalculable value. It should be noted, however, that 
hedging does not absolutely guarantee a merchant from loss, since 
advances or declines in the price of his future contracts may not 
exactly correspond with advances or declines in the price of spot 
cotton. The illustrations above given assume that absolutely correct 
methods of conducting the future business have been established. 
It can not be too forcibly emphasized, therefore, that in practice it 
has happened at various times that hedges have afforded a far less 
perfect measure of protection than above indicated. The hedging 
process has been explained mainly to show that the future systeny 
is something more than a device for mere speculation, and that 
it presents benefits of great value to those conducting business in 
actual cotton. In fact, for these, as individuals, the future system, if 
properly used, may be said to largely eliminate speculation.^ Obvi- 
ously, for a merchant, without hedging, to buy 10,000, 20,000, or 
50,000 bales of a valuable commodity like cotton, which is subject to 
great fluctuation in price, would be a highly speculative transaction, 

' Hedges are sometimes used in this way by retail merchants carrying only a 
few thousand dollars' worth of goods. 
^ See note i, page 803. 



PROFITS 807 

whereas, under a perfect working of the hedging system, the element 
of speculation can be largely avoided. This opportunity for hedging 
is, indeed, regarded by practically all cotton merchants as almost an 
absolute necessity under modern methods of conducting business. 

An idea of the value of the hedging function may be obtained when 
it is stated that in Great Britain banks very generally refuse to loan 
money on cotton which is not hedged. Moreover, it is almost 
universally conceded that, since the introduction of hedging, failures 
in the cotton trade, which had previously been frequent, have been 
materially reduced as a direct result of the greater stability with 
which transactions in spot cotton can be conducted. 

229. FIRE INSURANCE AND CREDIT' 

Fire insurance plays another very important role, besides those 
already enumerated.^ It is the support of commerce and industry 
in so far that it is the basis of our whole credit system. The impor- 
tance of insurance in this respect becomes apparent when we reflect 
that it is estimated that only about 5 per cent of the world's business 
is conducted on a cash basis, and that 95 per cent is based on credit. 

A thousand illustrations can be cited to show the far-reaching 
influence of fire and marine insurance upon our credit system. A 
cargo of grain is shipped from the United States to Europe, and is 
paid for through the shipment of a cargo of manufactures from Europe 
to America. Here we have a transaction based on credit and con- 
summated without the use of cash. Commodities are used to pay 
for commodities, and, owing to the costliness of settling international 
debts by the actual transfer of gold from one country to another, this 
practice is almost invariably adopted. The whole transaction is 
based on credit, and the important thing to remember is that the 
foreign exchange banker, who undertakes the financial settlement of 
these two shipments, knows that this credit is guaranteed by a fire and 
marine insurance policy. The insurance of these cargoes in reliable 

' From Solomon S. Huebner, Property Insurance, pp. 9-13- D. Appleton & 
Co., 1911. 

[=The author mentions three other functions of fire insurance: (i) The reduc- 
tion of the element of uncertainty resulting from a combination of risks; (2) the 
benefit resulting from having a specialized business for the assumption of risks of 
producers who are ignorant of the relative fire hazard connected with the different 
types of property; (3) the increase in the efficiency of men because they venture 
more willingly. — Editors.] 



8o8 MATERIALS FOR ELEMENTARY ECONOMICS 

companies made the transaction as certain as though all payments 
were made in cash. If the property involved in any of these shipments 
had been destroyed by fire or by the perils of the sea, the creditors 
would nevertheless be protected, since the loss would be made good 
by the insurance companies. 

Without fire insurance as collateral security the wholesale mer- 
chant could not extend credit to the retailer. But with the goods 
insured in a reliable company against loss by fire, the wholesale 
merchant can grant an able and honest retailer credit to the extent of 
five times his capital, and at the same price he would demand if paid 
cash. Because of the protection promised by an insurance company 
the wholesaler advances the goods to the retailer. He knows the 
retailer to be honest and able, and that when the goods are sold he 
will receive his payment out of the proceeds of the sale. The only 
risk is the danger of destruction of the goods before the retailer has 
sold them, thus probably making their payment impossible. Through 
insurance this risk is eliminated and the retailer becomes a cash 
trader, as far as the securing of favorable terms from the wholesaler is 
concerned. 

In the same way, the wholesaler, if he is operating on borrowed 
money, can secure the most favorable rate from the lender of credit, if 
he protects his banker or the manufacturer of the goods with an 
insurance policy. In buying the goods the wholesaler may pay only 
lo per cent of the purchase price in cash, the remaining go per cent 
being advanced as a loan by the banker or manufacturer, the security 
for the loan being the goods themselves, but only when insured against 
loss by fire. Of course the wholesaler or retailer, as the case may be, 
must pay for the insurance, but the reduced price at which he gets the 
goods, or the favorable rate of interest at which he secures the credit, 
pays for this insurance over and over again. As an insurance policy 
may be made to cover all stock that goes into a store from time to 
time during the term of the policy, $10,000 of insurance may, in the 
course of a year, have under its protection from $50,000 to $75,000 
worth of merchandise, thus distributing the cost of the insurance over 
large property values. 

It may be shown in another way that fire insurance enables a 
man with limited capital to transact a business much larger than he 
otherwise could. Assume a grain dealer to be the possessor of $40,000 
capital. With this capital he purchases wheat in the West at $1 a 
bushel, with a view to selling it in the East or storing it in a warehouse 



PROFITS 809 

for a more favorable market. If this grain dealer's transactions were 
limited to cash purchases of wheat, he would probably be obliged to 
wait several weeks before he could sell his grain and liberate his 
capital for a new purchase, and his profit would be exceedingly small, 
since modern competition in that business enables him to realize a 
profit of only one to two cents per bushel. Grain dealers cannot 
afford to transact business on this basis, and all are obliged to resort 
to the use of credit. Instead of limiting his purchases to 40,000 
bushels, our dealer will at once have this wheat inspected, graded, 
represented by warehouse receipts, and will have it insured against 
loss by fire in a reliable company. Then he will take the warehouse 
receipts, representing the wheat, and the insurance policy to his 
banker as collateral security for a loan and the banker will lend him 
money, probably, to the extent of 90 per cen,t of the value of the wheat, 
or $36,000. If wheat remains at $1 a bushel, the dealer can at once 
purchase 36,000 bushels more with the proceeds of this loan. This 
new purchase of wheat will again be represented by new warehouse 
receipts, and again protected by a fire-insurance policy, and the ware- 
house receipts and the policy covering the 36,000 bushels can be offered 
to the banker as collateral security for a new loan of 90 per cent of the 
value, or say $32,400. With this new loan the dealer can at once 
purchase more wheat, can insure it, and with the new warehouse 
receipts and the fire-insurance policy as collateral obtain another loan, 
and with this loan buy more wheat. By repeating the operation 
until his original capital has been absorbed in margins, it becomes 
clear that this grain dealer, though he started with only $40,000 
capital, is nevertheless enabled, through the use of fire insurance, to 
do a $300,000 business, and accordingly makes seven or eight times the 
profit he could realize if his business were restricted to cash trans- 
actions. The banker is willing to extend the credit, partly because he 
knows that wheat always has a ready market on our big produce 
exchanges, thus in case of a decline in price giving him a chance to 
sell the wheat before the margin of ten points on the loan is exhausted, 
and partly because the fire-insurance policy protects him against the 
loss by fire of the security back of his loans. Likewise the exporter of 
a cargo of cotton may insure it under a marine policy, and with the 
policy and bill of lading as collateral may at once command money at 
the usual rate of interest, with which to buy another cargo and repeat 
the operation. 

Insurance also helps to build homes, since the owner of ground 



8lO MATERIALS FOR ELEMENTARY ECONOMICS 

who wants to build a home can borrow a larger sum of money on the 
building, if insured, and at a more favorable rate, than if there 
were no insurance. Mortgagees invariably have their interest in 
the mortgagor's property protected by an insurance policy. In a 
hundred ways fire and marine insurance have become absolute 
necessities of trade, without the assuring protection of which the large 
undertakings of today would be a gigantic gamble, and would never be 
attempted if liable to miscarry through a single fire or marine disaster. 
As it is, enormous sums are borrowed on stocks and bonds and ware- 
house receipts; merchants sell their wares on credit; investors furnish 
millions for the upbuilding of vast industries supporting whole towns; 
capitalists make loans on buildings worth many times the value of the 
ground on which they are built — all being willing to do this because 
they know that the insurance policy stands as collateral between them 
and loss. " All in all," as Mr. Campbell writes, " no statistics would be 
possible to show the extent of the fire-insurance business as now prac- 
ticed, for those figures would need to be as large as those of all trade. 
There is practically no combustible property that is not insured against 
fire;, every car of grain, ever scowload of lumber, every bale of cotton, 
every package of manufactured goods, from the time it assumes mer- 
chantable shape until it is entirely consumed, is thus conditionally the 
property of insurers. Without such a system, modern commerce 
would be impossible. The fire-insurance policy, or the assignment of 
certain interests in it, is attached to the mortgage given by the farmer 
for money to build his new barn; the fire-insurance policy is as neces- 
sary to the banker as is the warehouse or shipping receipt on the 
strength of which he advances funds for that magic of commerce 
* moving the crop ' ; fire insurance is as important to the manufacturer 
as is the foundation under his factory; fire insurance is, in fact, 
the very backbone of that part of social life which has to do with mak- 
ing, moving, and keeping material things." 

230. EMBARRASSMENT OF INDUSTRY THROUGH LACK OF 

INSURANCE' 

Business men in Missouri are beginning to realize that an un- 
precedented situation will exist in their state after April 30, when all 
the stock fire insurance companies will stop doing business because of 

'Adapted from TJte Journal of Commerce and Commercial Bulletin, April 18, 
1913- 



PROFITS 8ll 

what they hold to be the impossible requirements of the new Orr anti- 
compact law. Loans are being canceled, lines of commercial credit 
are being reduced or cut off entirely and it is at last being realized 
to how many branches of trade the protection of fire insurance is 
absolutely essential. 

In the meantime business men are urging the state authorities 
to grant them some relief. In many lines of activity, where credit 
is essential, based upon the fire insurance to protect the actual values, 
business will be practically paralyzed. 

The Metropolitan Life has called off negotiations for a loan of 
$1,200,000 it was preparing to make for the erection of a ten-story 
office building in St. Louis, refusing to go any further until it can be 
assured that its value can be protected by sound insurance. 

The chief credit manager of a large mercantile house said today: 
"The situation in Missouri threatens to be serious. Lack of lire 
insurance will undoubtedly affect our action in extending credit. 
There are many merchants to whom we might extend a reasonable 
line, provided their goods not yet paid for in full were protected by 
insurance, whom we will be forced to refuse if we cannot have this 
necessary guarantee." 

231. SOME FUNCTIONS AND EFFECTS OF INSURANCE' 

Technical insurance is defined as that arrangement by which per- 
sons subject to a risk agree directly or indirectly with each other 
that those who escape the threatening event will make up to those 
who suffer by it the whole or a part of the loss. 

The main purpose of technical insurance is to relieve the individual 
of the burden of risk resting upon him. Aside, however, from the 
direct effect of technical insurance, there are certain subsidiary effects 
upon the social organism. Some of these effects are good, and some 
are unfavorable. Let us consider the good effects: (a) The decrease 
of the cost of production. Under the head of producer's insurance 
we saw that risk to the individual producer was a subjective cost, 
and that marginal subjective estimates of risk enter in as a deter- 
minant of objective cost. Now, technical insurance comes in, and 
removes the major part of this item of cost. The producer, in place 
of carrying a risk that is burdensome to him, pays a premium which 

' Adapted from John Haynes, "Risk as an Economic Factor," in The Quarterly 
Journal of Economics, IX, 442-46 (July, 1895). 



8l2 MATERIALS FOR ELEMENTARY ECONOMICS 

is relatively light. Nowhere is this more true than in the case of 
marine insurance. Imagine that marine insurance did not exist. 
The shipping business would be carried on only by great companies 
possessing many ships, so that they could get the benefit of self- 
insurance. It needs no argument to prove that the price of foreign 
merchandise would be much higher than now. Fire insurance is 
another excellent example of this fact. This brings us directly to 
the next advantage of technical insurance, which is a corollary of 
what has just been said, (b) It makes it possible for small producers 
to hold their own, where otherwise they would be forced out of busi- 
ness, (c) Technical insurance prevents the impairment of the pro- 
ductive force of society by putting productive agents back into their 
old positions after a disaster. President Walker^ shows how labor 
may become permanently degraded as the result of temporary mis- 
fortune. Suppose a village whose chief support is a single industrial 
establishment. Suppose this establishment burned, with no insur- 
ance. The employer cannot readily transfer himself to another place 
where his talents can be used so advantageously, and the same is true 
of the laborers. Both become discouraged, and the industrial effi- 
ciency of master and man may be forever impaired. Insurance 
guards against this calamity. Fire insurance, accident insurance, 
and insurance against sickness are efficient in the same way. Life 
insurance in a more direct way accomplishes the same result by keep- 
ing families together, and allowing the orphan children to be brought 
up with proper training, all of which results ultimately in increased 
productivity, (d) Technical insurance is an aid to credit. The 
practice is universal of requiring houses, or other inflammable property 
on which money is raised by mortgage, to be insured. Without 
insurance, many who now borrow freely from savings-banks and 
other lenders would be unable to borrow at all, and others would 
borrow only at ruinous rates, (e) Life insurance combines what I 
have called self-insurance of the nature of saving with technical 
insurance. A form of life insurance which does not do this is con- 
ceivable, and has sometimes been tried; but the common form lays 
aside a reserve fund against the claim of each person insured. This 
form of insurance, therefore, encourages capitalization. This, to be 
sure, is not a net gain, because a man who is insured, feeling a sense 
of security, is likely to spend that part of his income which is left 
after paying his insurance premium more freely than would be the 

' Wages Question, chap. iv. 



PROFITS ' 813 

case if he were not insured. But, as premiums are generally paid 
out of income, we may conclude with Schonberg^ that "there is 
generally a stronger building up of private capital than would other- 
wise follow." (J) The sociological and ethical effects which result 
from the security and comfort which insurance gives are influences 
for good. 

The good effects above enumerated are not without some off- 
setting disadvantages. Security is good, but security as well as 
hazard may have an unfavorable effect upon industry, (a) Intensity 
of effort is diminished. Make the ordinary man's future secure even 
on a low material basis, and his energy will flag to some extent. 
(b) Carelessness is encouraged by insurance. Much wealth, for 
instance, goes up in smoke simply because vigilance is relaxed on 
account of the property being insured, (c) The greatest disadvantage 
of technical insurance is the encouragement which it gives to dis- 
honesty. Property is wilfully destroyed to get insurance, thus 
increasing the net amount of property destroyed and increasing the 
cost of insurance to honest men. I have been informed that where a 
mill burns in a factory village the village hotel is almost sure to follow. 
The same informant states that a prudent insurance man of his 
acquaintance makes it a rule, on learning of the burning of a mill 
in a village, to cancel all insurance held by him on the hotel. It is 
estimated^ that from 35 to 50 per cent of the loss by fire in the 
United States is chargeable to incendiarism. 

Technical insurance is attended with a large expense for manage- 
ment, and, at present, this is excessive. Not that insurance men 
make greater gains than other business men, but there are more 
agents for all kinds of insurance companies than there i^ economic 
justification for. . This is true of a great many other kinds of busi- 
ness. But insurance furnishes one of the best examples of the tre- 
mendous wastes of the competitive system. 

' Volkswirthschaftslehre, p. 798. 

2 Thomson, "Waste by Fire," Forum, II, 27 ff. (September, 1886). 



8 14 MATERIALS FOR ELEMENTARY ECONOMICS 

232. FINANCIAL STATEMENTS OF TWO CORPORATIONS 

I' 

The Income Account 

Manufacturing earnings $1,400,097.00 

Other earnings 125,434.00 



Total income $1,525,531.00 

Expenses and maintenance $312,218.00 

Interest on bonds 850,000. 00 

Sinking fund 100,000. 00 

$1,262,218.00 



Available for dividends 263,313.00 

Dividends paid 249,564. 00 



Carried to surplus $13,749. 00 



The Balance Sheet 

Assets Liabilities 

Paper mill plants and Capital stock $22,000,000 

real estate $16,689,441 Bonded debt 17,000,000 

Good will, trade marks. Accounts payable and 

etc 18,010,150 current bills 1,221 

Cash 722,754 Sinking fund reserve. . 1,504,750 

Bills and accounts re- Surplus 2,019,380 

ceivable 1,321,935 

Goods and materials .. . 2,901,697 
Bonds of the company 

in treasury 1,120,152 

Miscellaneous stocks. . . 254,472 

Sinking fund 1,504,750 



Total $42,525,351 Total $42,525,351 



Adapted from American Writing Paper Company, Annual Report, 1911. 



PROFITS 815 

The Income Account 

Sales of harvesting machinery, tillage 

implements, engines, tractors, 

cream separators, farm wagons, 

manure spreaders, auto-wagons, 

twine, and steel products $125,438,104.30 

Miscellaneous earnings and charges 

(net) 1,080,133 .32 

$126,518,237.62 

Deduct: 

Cost of manufacturing and dis- 
tributing $98,088,042 . 66 

Ordinary repairs and maintenance 3,241,255.51 
Renewals and minor improvements 776,358.74 
Experimental, development, and pat- 
ent expenses 746,147 . 92 

Administrative and general expenses 740,390. 36 

Interest on loans 2,372,307. 70 

Appropriation for fire insurance fund 2 50,000 . 00 

Reserve for pension fund 250,000. 00 

Reserve for industrial accident fund 250,000.00 
Reserves for plant depreciation and 

ore extinguishment 2,308,137.57 

Reserves for contingent losses and 

collection expenses on receivables 1,100,000.00 

$110,122,640.46 

Net profit $ 16,395,597 . 16 

Preferred stock dividends $4,200,000.00 

Common stock dividends 4,000,000. 00 

$8,200,000.00 

Undivided profits carried to surplus 8,195,597. 16 

Previous surplus 23,390,946.90 

Total surplus at end of year. . . $31,586,544.06 

'From International Harvester Company, Annual Report, 1912. 



8l6 MATERIALS FOR ELEMENTARY ECONOMICS 

The Combined Balance Sheet 

Assets 

Property account: 

Real estate and plant property, ore 
mines, coal and timber lands, 
December 31, 1911 $75,527,097.21 

Net capital additions during 1912 . . 2,668,110.91 

$78,195,208. 12 
Expenditures for stripping and de- 
velopment at ore mines 1,070,408. 93 

$79,265,617.05 

Deferred charges to operations 191,512.41 

Fire insurance fund assets 1,484,237 . 50 

Current assets: 
Inventories: 

Finished products, raw materials, 

etc., at close of 191 2 season. . . $49,386,478. 19 
Subsequent material purchases 
and manufacture for 191 3 
season 25,691,737 . 68 

$75,060,215.87 
Receivables: 

Farmers' and 
agents' notes . $62,437,389.11 

Accounts receiv- 
able 22,761,854. 14 

$85,199,243.25 
Deduct: 
Accumulated re- 
serves for con- 
tingent losses . . $3,700,864 . 87 

$81,498,378.38 

Cash 5,420,582 . 69 

$161,979,176.94 

$242,920,543.90 



PROFITS 817 

Liabilities 

Capital stock: 

Preferred $60,000,000. 00 

Common 80,000,000. 00 

$140,000,000.00 

Purchase-money obligations 296,000.00 

Current liabilities: 

Bills payable $35,260,220.00 

Accounts Payable: 
Current invoices, 
payrolls, ac- 
crued interest 

and taxes, etc. . $11,687,114.60 
Preferred stock 
dividend (pay- 
able March i , 

1913) 1,050,000.00 

Common stock 
dividend (pay- 
able January 

i5> 1913) 1,000,000.00 $13,737,114.60 

$48,997,334.60 

Reserves: 
Plant depreciation and extinguish- 
ment $11,643,083.39 

Special maintenance 1,597,948. 56 

Collection expenses and receivables 1,100,000.00 

Fire insurance fund 2,612,939. 84 

Pension fund 1,298,568.45 

Industrial accident fund ; . . 788,125.00 

Contingent 3,000,000. 00 

22,040,665.24 

Surplus 31,586,544.06 



^2,920,543.90 



8i8 MATERIALS FOR ELEMENTARY ECONOMICS 

233. MONOPOLY PROFITS: THE TOBACCO TRUST' 

This coincidence of a high rate of earnings with a high degree of 
control evidently is not accidental. Wherever possible, the Combina- 
tion has taken advantage of its monopolistic position to increase 
its profits. On the one hand, it has been able to reduce the costs of 
production as well as the expenses of selling, and on the other hand it 
has maintained the prices of its products at the high level established 
at the time the Combination was effected. This high level of prices, 
it will be remembered, was made necessary by a temporary heavy 
increase in the internal revenue tax. The monopolistic position of 
the Combination enabled it, however, to appropriate to itself prac- 
tically the entire reduction subsequently made in the tax, by holding 
prices at their former level. Moreover, whatever increase in costs of 
production through increase in the price of raw materials has occurred 
since then has been practically offset by additional increases in the 
price of the product. 



234. AN EXAMPLE OF FORTUITOUS PROFITS^ 

In his report for 1866-67, the commissioner called attention to the 
circumstance that, although the profits which had accrued in the 
manufacture of cotton during the period of the war were acknowledged 
by one of the leading manufacturers of the country to have been 
"painfully large," yet such profits were the result of extreme advances 
in the prices of raw and manufactured material previously on hand, 
rather than of the operations of strictly legitimate business; and in 
proof of this assumption, a statement was submitted, showing that 
in the case of one large cotton manufacturing corporation in New 
England, if their mills had been burnt at the commencement of the 
war, their insurance lost, and their whole capital, other than that 
invested in cotton, sunk, but the cotton on hand sold at the highest 
obtainable prices, the result would have afforded to the stockholders 
a permanent annuity of at least twelve per cent on their original 
investment. Now, what was true of cotton manufacturing at that 
period was equally true of the wool manufacture; and in a majority 
of instances the large profits realized by the woolen manufacturers 

' From the Report of the Commissioner of Corporations on the Tobacco Industry, 
Part I (1909), p. 165. 

^ From the Report of the Special Commissioner of the Revenue (1869), p. xciii. 



PROFITS 819 

of the United States from 1863 to 1866 were due rather to the rise 
in the price of their raw material than to any legitimate profits 
derived from the manufacture and sale of their productions. 

235. THE PROFITS OF AN UNDERWRITING SYNDICATE^ 

Very convincing evidence of an excessive issue of securities by the 
Steel Corporation is afforded by the enormous payment which it 
allowed the underwriting syndicate, so called. The syndicate agree- 
ment provided that in addition to undertaking to secure at least 51 
per cent of the stocks of the various companies originally to be 
acquired, the syndicate should furnish the Steel Corporation with 
$25,000,000 cash capital. In addition to this sum, the syndicate 
incurred expenses of about $3,000,000 attendant upon the organiza- 
tion of the Corporation, through fees, purchase of miscellaneous 
securities, etc., which sum should be added to the $25,000,000 cash 
capital provided, in stating the total cash consideration provided 
by the syndicate. For this total cash consideration of $28,000,000 
and its services the underwriting syndicate received from the Steel 
Corporation the enormous total of practically 1,300,000 shares of its 
stock (half preferred and half common), of an aggregate par value 
of $130,000,000. That this huge block of stock was actually received 
by the syndicate was explicitly stated in the preliminary report of 
the Steel Corporation, which, after giving the amounts of stock issued 
to acquire the securities of the constituent concerns, further stated: 

The residue of the common and preferred stock of this corporation 
delivered to the syndicate under the contract of March i, 1901, and not 
used for the acquisition by it of the stocks of the specified companies, 
being the shares which, as stated in the syndicate circular of March 2, 1901, 
were to be retained by and to belong to the syndicate, amounted to 649,987 
shares of preferred stock, and 649,988 shares of common stock. This 
residue of stock or the proceeds thereof, after reimbursing the syndicate 
the $25,000,000 in cash which it paid to the Corporation, and approxi- 
mately $3,000,000 for other syndicate obligations and expenses, con- 
stituted surplus or profit of the syndicate. 

This enormous "residue," as it was termed, yielded a very large 
profit to the syndicate. At valuations of 44 for the common stock 

' Adapted from the Report of the Commissioner of Corporations on the Steel 
Industry, Part I (1911), pp. 243-46. 

[For the terms of this underwriting agreement see Selection 89. — Editors.] 



820 MATERIALS FOR ELEMENTARY ECONOMICS 

and 94 for the preferred stock (the average prices, respectively, at 
which these shares sold during the first year after the organization 
of the Steel Corporation), the total value of these stocks thus delivered 
to the syndicate would have been approximately $89,700,000. As a 
matter of fact, it appears that the amount actually realized by the 
syndicate was about $90,500,000. After reimbursing the syndicate 
for the $25,000,000 cash capital raised by it, and also for the $3,000,000 
incurred in expenses, the syndicate managers paid out in profits to 
syndicate members substantially $50,000,000. Before distributing 
these huge profits, however, J. P. Morgan & Co., as syndicate man- 
agers, reserved as their compensation 20 per cent of the total profits. 
The total profits consequently were one-fourth greater than the 
amount thus distributed to syndicate members, or, in other words, 
they were, roughly speaking, $62,500,000. 

It may be noted that about $4,000,000 of this total was not in the 
form of cash. After reimbursing the syndicate for its cash obligations 
of $28,000,000, the syndicate managers paid four cash dividends of 
$10,000,000 each (after reserving in each case their 20 per cent com- 
mission), and a final dividend of $6,000,000 in cash plus $4,000,000 
paid-up participation in a syndicate then being organized by J. P. 
Morgan & Co. to underwrite the so-called "bond conversion" scheme 
of the Corporation. There is some question whether this $4,000,000 
participation in the second syndicate realized its par value on the 
liquidation of that syndicate, but any difference between the amount 
finally realized and the par value ($4,000,000) was undoubtedly so 
small that it can be disregarded. The profit on this operation over 
and above all expenses may therefore be fairly stated at $62,500,000. 

There can be no question that this huge compensation to the syndi- 
cate, or, in other words, the enormous block of stock upon which this 
profit was realized, was greatly in excess of a reasonable compensa- 
tion. The syndicate was, of course, properly to be reimbursed not 
only for the $25,000,000 new cash capital which it provided the Cor- 
poration, and for the $3,000,000 of expenses incurred, but was also 
entitled to some compensation for the labor and risk of raising these 
sums. Moreover, the syndicate presumably rendered some other 
services of value in facilitating the organization of the Corporation 
and the flotation of its securities, for which it would reasonably 
expect some compensation. However, these services certainly were 
not worth anything like the enormous price which the Corporation 
paid. Nor can this payment be justified on the ground of extraordi- 



PROFITS 821 

nary risk. The Corporation was organized at a time of pronounced 
buoyancy in the stock market and decided prosperity in the steel 
industry. It is true that only a short time after its organization the 
famous Northern Pacific corner and the resulting stock-market panic 
occurred. Such a contingency, however, is one of the possibilities 
that all underwriting syndicates have to take account of, and was 
entitled to no more weight in this case than in the case of numerous 
other underwriting arrangements which were made by other large 
corporations at the same period. 

It is, moreover, true that the nominal liability of the syndicate, 
or what may be called its nominal capital, was $200,000,000. This, 
however, was the liability of the syndicate subscribers to the syndi- 
cate managers and not to the Steel Corporation, to which its cash 
liability, as just shown, was only $25,000,000 (not including $3,000,000 
of expenses). It was the understanding, tacit or expressed, that the 
syndicate managers did not expect to call upon the syndicate sub- 
scribers for more than a single payment of 12^ per cent of the total 
nominal liability ($200,000,000), or $25,000,000. As a matter of fact, 
that was the only call actually made. Had a further call been made 
upon the syndicate subscribers, this would have been to meet tem- 
porary exigencies accompanying the flotation of the Steel Corpora- 
tion's stock, and not to make any further payment to the Corporation 
itself. The large nominal obligation of the syndicate subscribers to 
the syndicate managers apparently was determined upon in part with 
a view to disarming subsequent criticism of the enormous compensa- 
tion which it received. 

A very important consideration to point out is that while the syndi- 
cate was, from the standpoint of the prestige and reputation of the 
bankers identified with it, nominally compelled to see the organization 
of the Steel Corporation successfully through, there was no legal 
obligation of this sort whatever. Instead, a circular of the syndicate 
managers to the stockholders of the various constituent concerns 
which were to be acquired stated very positively that the syndicate 
managers might at any time wholly abandon the transaction, in which 
event the stockholders in the acquired companies would have no claim 
whatever against the syndicate managers. This is shown by the 
fourth paragraph in the ofl&cial circular of J. P. Morgan & Co., the 
syndicate managers, as follows: 

The undersigned are authorized to proceed with the proposed trans- 
action whenever in their sole judgment a sufificient amount of the stocks 



822 



MATERIALS FOR ELEMENTARY ECONOMICS 



of said companies, or of any of them, shall have been deposited. They 
reserve the right, at any time, in their discretion, to wholly abandon the trans- 
action and to withdraw their offer herein contained, as to all the depositors, 
by publication of notice of such withdrawal in two daily newspapers in the 
city of New York; and in that event all the deposited shares shall be 
returned without charge upon surrender of the respective receipts therefor. 
In case of any such withdrawal of the offer hereunder as to all or to any 
depositors, such depositors shall have ?io claim against the undersigned, and 
shall only be entitled to receive their deposited securities upon surrender of 
the respective receipts therefor. 

It may be objected, as just suggested, that it is almost incredible 
that the syndicate managers would abandon the transaction. Never- 
theless, this distinct provision that they might do so if they saw fit 
without giving any explanation and without rendering themselves 
in the slightest way liable, clearly is entitled to great weight in 
judging the risks assumed by the syndicate. As a matter of fact, as 
the sequel showed, the syndicate was compelled to bear only a very 
moderate risk, while it was one of the most profitable ever organized 
in the United States. 

236. A CLASSIFICATION OF BUSINESS FAILURES BY 
CAUSES (1911 and 1912)' 



Failures Due to 



United States, Percentage 



Number 



1912 



igii 



Liabilities 



1911 



Canada, Percentage 



Number 



1911 



Liabilities 



igii 



Incompetence. . . . 

Inexperience 

Lack of capital. . . 
Unwise credits. . . 
Failure of others. . 
Extravagance .... 

Neglect 

Competition 

Specific conditions 

Speculation 

Fraud 



30.2 
4.6 

29.7 
2.0 
1-3 
■7 
2.0 
1.9 

16.5 
.8 

10.3 



27.0 
41 

31-4 
2.0 

1-3 

•9 

2. 2 

2.9 

16.9 

•7 
10.6 



23-5 
2.2 

28.3 
2. 2 
4 2 
1.2 

1-3 
4.8 
20.7 
2.7 
8.9 



16. 1 
2.9 

49-3 

•9 

1. 1 

•9 

41 

I . I 

14.6 

■9 



18.9 

i-S 
47.8 
i.o 
1-4 
3-2 

25 

.6 

10. 1 

3-1 
9.9 



Bradstreel's, XLI, 53. 



PROFITS 823 

237. TWO INSTANCES OF FAILURE 

The Allis-Chalmers Company has defaulted on the interest 
payments due on its bonds. It is unofficially reported that the 
company's embarrassment is largely due (i) to the decline in orders 
for its steam engines, due both to the competition of turbine engines 
and to the increasing use of hydro-electric power; (2) to the inability 
to obtain sufficient business to keep more than a part of its large 
electric manufacturing plant in operation; and (3) prospectively 
to the heavy sinking-fund requirement which, beginning this year, 
requires a steadily increasing annual purchase of the company's 
bonds. The directors are of the opinion that the business cannot 
be profitably continued in the future unless additional working 
capital is supplied and the fixed charges reduced, and that these can 
only be secured by reorganization.' 

The creditors' committee of the United States Finishing Company 
has made a preliminary report, or a summary of the situation, and 
has furnished a digest over which amazed stockholders will pore 
anxiously for some days to come. 

Briefly stated, the United States Finishing Company has through 
subsidiary corporations engaged in merchandising, in speculating in 
its own stocks and bonds, and in financial collateral ventures, such 
as the purchase and sale of lumber, the manufacture of packing 
boxes, the purchase and sale of chemicals, supplies, etc. Some of 
these investments, noticeably that in the Queen Dyeing Company, 
have proved profitable, but in the main the working capital of the 
United States Finishing Company has been depleted to the extent 
of approximately $1,250,000. A portion of the loss can be accounted 
for through the payment of unearned dividends. Through the recent 
failure of the corporation, G. A. Stafford & Co., an additional loss 
was sustained. The Finishing Company owns the entire capital 
stock of the Sterling Improvement Company, which company had 
made substantial purchases of the stock and bonds of the Finishing 
Company, so that through the depreciation of the securities of the 
Finishing Company a further loss was incurred. The market value 
of all the investments is problematical and the realization of their 
intrinsic value promises to become a slow process.^ 

'Adapted trom The Commercial and Financial Chronicle, January 6, 1912. 
* Adapted from The Journal of Commerce and Commercial Bulletin, May 6, 
1913- 



XIX. PUBLIC FINANCE AND TAXATION 

238. THE GROWTH OF STATE AND LOCAL EXPENDITURES^ 

In discussing the growth of state expenditures during the nine- 
teenth century, there are adequate reasons for dividing the period 
in quarter-century divisions on the basis of the different character 
of the expenditures. The first quarter, from 1800 to 1825, presents 
nothing remarkable, for the expenditures were neither large nor 
varied. Cities had not yet risen to any importance as industrial 
centers, and the large debts of the Revolutionary War had been 
assumed by the national government. 

The total population of the United States was only about ten 
millions at the close of the first quarter century, and this population 
was distributed over a wide area, with wants few and activities 
simple. The bulk of the expenditures went for the primary func- 
tions of government, with some of the states spending considerable 
sums on education and others on internal improvements. However, 
during the next quarter century, from 1825 to 1850, there was a 
decided growth of state expenditures, for this was the period of 
state activity in internal improvement and public banking. 

The masses of people in their enthusiasm for internal improve- 
ments did not think that these undertakings could mean a burden 
to them in the way of increased tax levies, as is evidenced by the 
debates on the various bills proposed for their construction. They 
supposed that the increase in value of property would more than 
offset the cost of their construction, and it was not until the later 
forties that they were awakened from their delusion, although care 
must always be taken in speaking of these internal improvements 
as failures, for the indirect wealth and social well-being which they 
brought to the country was very great. But the people, on account 
of permitting their enthusiasm to lead them to construct transporta- 
tion routes beyond the industrial demands, and through their enthu- 
siams being taken advantage of by speculators, found themselves 

'Adapted from W. F. Gephart, "The Growth of State and Local Expendi- 
tures," in Stale and Local Taxation, Addresses and Proceedings of the Second 
International Conference (1908), pp. 514-24. International Tax Association, 
1009. 

824 



PUBLIC FINANCE AND lAXATION 825 

with large financial burdens resting upon them at the close of the 
second quarter of the century, which must be met by increased 
taxation or repudiated. Some of the states petitioned Congress 
to assume these state debts, resting their claim on the ground that 
the public lands had been transferred to the national government 
for the specific aid of the states, and now was the time to extend 
this aid. Congress, however, refused, and there was nothing left 
for the states to do but to pay for these past expenditures. 

As tax rates began to increase, many of the states either amended 
their constitutions or adopted new ones with provisions which would 
prevent a like occurrence. These amendments and new provisions 
limited the borrowing power of the legislatures and prohibited the 
loaning of the credit of the state or the local governments to or in 
the aid of joint stock companies. After 1850 the expenditures of 
the states were kept down, since they were paying for past ones. 
The policy of limited expenditure and debt payment continued until 
the Civil War, when another period of large expenditures began, so 
that by 1870 the state debts amounted to $352,866,698, the largest 
sum at the close of any decade in the history of the states. 

The quarter century closing with 1875 may be described as one 
in which there was a decided tendency to limit expenditures, largely 
due to the large outlays of the preceding quarter century, which were 
largely met out of the revenues of the later period. This policy of 
limited state expenditures was in a large way continued for the next 
decade after 1875, although during these years there was somewhat 
of an increase for such developmental functions as education, espe- 
cially in the Middle West, through the establishment of state uni- 
versities, and the generally more liberal aid to education, for the 
establishment of institutions for the care of the defective and delin- 
quent classes, for the establishment of commissions or departments 
for investigation or administration such, for example, as state health 
boards, railroad and labor commissions. 

Since 1885 there has been a tendency for state expenditures to 
increase, owing to the states taking up new lines of activity and 
extending some of the old functions. 

It has been held that state expenditures will tend to decrease, 
as compared with local and national expenditures, and while this 
is probably true, as a very general proposition, yet during the past 
two decades, particularly the last, we have seen the states assuming 
new functions, notwithstanding the oft proclaimed infringement of 



826 MATERIALS FOR ELEMENTARY ECONOMICS 

the state sphere of action by the national government. Among 
these new lines of activity which will call for increased expenditures 
may be mentioned the following: 

(a) The centralization of state administration, such, for example, 
as the extensive powers of state boards of health. In some states 
no waterworks, garbage disposal, or sewage disposal plant may be 
constructed by a local government without this board's approval. 

(b) The establishment of public utility commissions or the 
extension of the powers of railway commissions. 

(c) The increase in the state aid to education, not only in favor 
of the state educational institutions, but also for the common schools. 
Ohio, for example, has passed a recent law, which fixes a minimum 
salary for public school-teachers and provides that where the local 
tax raised under the maximum rate is not sufficient to pay this 
minimum salary, appropriations shall be made out of the state 
treasury. 

(d) Further aid in internal improvements, such, for example 
as the rebuilding of canals and aid in constructing highways, which 
aid under a late Ohio law amounts to 50 per cent of the cost of the 
road. 

(e) Expenditures for other institutions, such as penal, reforma- 
tory, and charitable, which in many states total large sums yearly. 

Thus it seems that, owing to the increasing solidarity of state 
interests, the state will assume in the future many new lines of activity, 
which will call for increased expenditures; and to meet these the 
states will have to abandon such a great reliance on the present 
outgrown general property tax. 

In 1840, 21 . 79 per cent of our population was engaged in agricul- 
ture, while in 1900 only 13.64 per cent was so engaged. In 1850, 
4.12 per cent of our population was engaged in manufacture and 
the mechanical arts, while in 1900 this had risen to 9.28 per cent 
which would seem to indicate a shifting of the population to the 
cities. 

This aggregation of population within limited areas has meant a 
continually nicer adjustment of individual to individual; for so 
complicated and numerous are the relations of a city dweller to his 
fellow, that those who will, do, and those who will not, must be made 
to, recognize the limits of personal action, in order that all may 
enjoy the larger privileges which come from collective activities and 
expenditures. All this has meant and will mean in the future the 



PUBLIC FINANCE AND TAXATION 827 

taking over by the city of many activities which could formerly be 
left to the individual. 

Sanitation and inspection is but one of these new activities, 
which has had a remarkable development during the last decade 
and will doubtless have a much greater one in the future; for when 
it is realized what a vast work there is to do in this field, we may 
well hope that the sanitary policeman will soon be a more important 
official than the peace and order one of today. Without further 
statement of the well-known fact that local expenditures have grown 
rapidly, we may take up the discussion of several questions which 
suggest themselves. 

First, expenditures are increasing more rapidly than population. 

Second, since 1890 municipal debts have been increasing more 
rapidly than population, and on this point it may be remarked 
that while theoretically the municipal citizen will admit that he 
ought to pay for what he uses and enjoys, yet this is not always done, 
and as a result the present generation is paying for the necessities 
and conveniences enjoyed by the past generation and leaving the 
coming generation to pay for much of what it is now enjoying. That 
this is true is due to two facts: first, it is much of a relief to present 
purses to place the burden on the future, and this is made possible 
by the financial system; and second, it is often impossible to calculate 
the lifetime of a public work. The plant may prove too small; 
mistakes in construction and use of material may easily be made. 

Third, assessed valuation tends to increase more rapidly than 
population, but less rapidly than expenditures. Hence the general 
property tax is not an adequate or satisfactory source of revenue 
for growing cities, unless the rate of taxation is increased, and the 
statistics given show that the rate has decreased. A decreased tax 
rate, whether it represents an apparent or a real saving, is one of the 
best means for the political "boss," who is so powerful in city affairs, 
to secure votes. 

Fourth, there must be an increase in receipts from sources other 
than the general property tax in order to meet these increased expendi- 
tures. There is doubtless a great waste in city expenditures, but it 
is questionable whether any considerable portion of this is due to 
"graft," as is popularly supposed. Doubtless a much greater portion 
of the waste comes from a failure to understand the economic and 
social work which the modern city is called upon to do through its 
officials and employees. Cities have grown so rapidly that we have 



828 



MATERIALS FOR ELEMENTARY ECONOMICS 



failed to devise methods to meet the problems resulting from this 
rapid growth. In the United States the average citizen has given 
little attention to city government and problems, preferring to give 
his time to his private business and permitting the public business 
to be done by the ignorant and dishonest, with the result that he 
knows but imperfectly what is secured for money expended. 



239. FEDERAL EXPENDITURES (ORDINARY) iSoo-igii* 
(Figures are in millions of dollars) 



o o 

O M 



1,300 

1,200 

1,100 

1,000 

900 

800 

700 
600 
Soo 
400 
300 
200 
100 



' The data are taken from the Statistical Abstract of the United States and the 
Annual Report of the Secretary of the Treasury. 



1,300 
















































1,000 
























900 
800 














































700 
600 














1 






























[ 


500 






















/ 


400 




















J 


V 


300 














\ 






r 


















^V/ 


-'v\r 






100 
























^s-'^ 


/-- 


WN.^ 




-^^ 


^ 













PUBLIC FINANCE AND TAXATION 



829 



240. THE COST OF GOVERNMENT, NATIONAL, STATE, AND 

LOCAL' 

I. NATIONAL 

Receipts OF the United States from Different Sources in 1911, Measured 

BY Per Cent of Total, by Area, and by Population, As Shown by 

THE Census of 1910. Fiscal Year Ending June 30, 1911 



II. 



HI. 



IV. 



V. 



Source of Receipts 



General revenues as follows : 

a) From taxes and licenses — 
i) Customs 

2) Internal revenue 

3) Corporation excise 

4) Bank note tax 

5-6) Other taxes , 



Total taxes and licenses. 

b) From fees, fines, and penalties . . . 

Total coercive revenues . 

c) From gifts and indemnities 



Total general revenues 
Commercial revenues, as follows: 

o) From departmental earnings — 

i) Profits on coinage 

3) Panama canal, sales, etc. . . . 
3) Other sales, rentals, etc 



Total departmental earnings . 

b-d) From lands, forests and sealskins . . . 

e) From postal service 

/) From interest 



Total commercial revenues . 

Total revenue receipts 

Non-revenue receipts, as follows : 

a) Offsets to outlays (realty sales) 

Panama bonds 

Transfers and refunds 

Agency and trust transactions — 

i) National bank note fund 

2) Trust funds 



b) 

c) 
d) 



Total non-revenue receipts . 

Receipts from local sources, as follows : 

a) Alaska fund and game licenses 

b) District of Columbia fund 



Total from local soiu-ces 
Net receipts unclassified 



Total Receipts 



Per Cent of 
Total 



31 526 

28.971 

3 360 

0351 
0.369 



64 577 

1 .062 



65 639 

0.068 



65.707 



0.529 
0.158 
o. 209 



0.896 

0.999 

23-845 

0.061 



25.801 
91 508 

0.114 
1.768 
0.637 

4 033 
1. 198 



7 750 



0.018 
0.708 



0.726 

0.016 



Per Square 
Mile* 



5105-75 

97-18 

II .27 

1.18 

1.24 



S216.62 

3-56 



S220.18 

-23 



$220.41 



$ 86 

306 



S26 



S2 



«335 



00 



45 



Per Capitaf 



$7 



S7 



$7 



00 



80 
93 

01 

19 

07 

44 
13 



84 



.00 
.08 



$ .08 

.00 



$10.85 



* Based on land area exclusive of outlying possessions (2,973,890 square miles), 
t Based on census of 1910 exclusive of outlying possessions (91,972,266 population). 

' From E. V. D. Robinson, "The Cost of Government in Minnesota," in the 
Third Biennial Report of the Minnesota Tax Commission (1912), pp. 267-95. 



836 



MATERIALS FOR ELEMENTARY ECONOMICS 



Payments of the United States for Different Purposes in 191 i, Measured 

BY Per Cent of Total, by Area, and by Population, As Shown by 

the Census, of 1910. Fiscal Year Ending June 30, 1911 



Purpose of Payment 



I. Government in general, as follows: 

1. Legislation — 

a) Congress 

b) Congressional commissions 

c) Public printing office 

d) Library of congress 

e) Other legislative expenses 

Total for legislation 

2. Administration — 

a) Executive proper 

b) Executive commissions 

c) Civil service commission 

d) Executive departments (general) — 

i) Treasury 

2) Interior 

3) Public buildings 

Total for administration 

Total for government in general . . 
11. Protection of life and property, as follows: 

1. Preservation of the peace — 

a) National defense — 

i) Foreign affairs 

2) Army and navy 

b) Courts and crimes 

Total for preservation of the peace 

2. Safeguarding public health and safety 

3. Regulation of industry in public interest. . . 

Total for protection of life and 

property 

III. Promotion of efficiency as follows: 

1. Public works — 

a) Irrigation and drainage 

b) Highways 

c-d) Inland canals, rivers and harbors 

e) Panama canal 

/) Telegraph and cable lines 

Total public works 

2. Other aids to private industries 

3. Scientific investigation and publication .... 

4. Education 

5. Recreation 

6. Soldiers' homes and pensions 

7. Indian service 

Total for promotion of efficiency. 



Per Cent of 
Total 



0-733 
0.013 
0.564 
0.067 
0.032 



1.409 

0.022 
0.026 
0.029 

2.468 
0-394 
2-157 



5.096 
6 505 



0.247 
24-554 



25 787 

1 .411 
0.469 



27.667 



0.834 

0.021 

3-485 
3-845 

0.029 



8.214 

1 . 272 

0-756 

0.037 

16.920 

0.675 



29.011 



Per Square 
Mile* 



!-37 
.04 

:.84 
. 22 
.10 



S4-57 

.07 
.08 
.09 

8.00 
1.28 
7.00 



$16.52 
21.09 



.80 

79.60 

3.20 



$83.60 

4-57 

1-52 



$89.69 



2.70 

.07 

11.30 

12.47 
.09 



$26.63 

3-69 
4.12 

2-45 
. 12 

54-85 
2.19 



$94 05 



Per 

Capita t 



$ .08 
.00 
.06 
.01 
.00 



$ .15 



.00 
.00 
.00 

.26 
.04 
•23 



$ -53 
.68 



■03 

2.57 

. 10 



$2.70 

-15 
■OS 



$2.90 



$3 04 



* Based on land area exclusive of outlying possessions (2,973,890 square miles), 
t Based on census of 1910 exclusive o( outlying possessions (91,972,266 population). 



PUBLIC FINANCE AND TAXATION 831 

Payments of the United States by Area and Population — Continued 



Purpose of Payment 

IV. Public services, as follows: 

1-2. Public lands and forests 

3. Mints and currency 

4. Postal savings banks 

5. Postal service 

Total for public services 

V. Local governments 

Total for maintenance and per- 
manent improvements 

VI. Interest on public debt 

VII. Principal of public debt 

VIII. Transfers, refunds, agency and trust payments 

Total Payments 



Per Cent of 
Total 



0-995 

0.484 

0.006 

24 834 



26 319 

1. 199 



90.701 

2 . 211 
3654 
3-434 



100.000 



Per Square 
Mile 



3 23 

1-57 

.02 

80.50 



$8s 32 

389 



$294 . 04 

7.17 
11.84 
II. 13 



$324 18 



Per 

Capita 



.10 

•05 

.00 

2.61 



$2.76 

■13 



$9 SI 

■23 
•38 
•36 



Sio . 48 



II. STATE (MINNESOTA) 
Total Receipts of the State of Minnesota in 1911 




3 af% 



"^z 



1.30f. 



5.01 % 



832 



MATERIALS FOR ELEMENTARY ECONOMICS 



Payments of the State of Minnesota in 19 ii by I'urposes, Measured by 
Pee Cent of Total, by True Valuation, and by Population 



Items 



Per Cent 
of Total 



Per 

$10,000 
True Val- 
uation 



Per 

Capita 



I. State government in general 

II. Protection of life and property: 

1 . Preservation of the peace — 

a) Courts 

b) Militia 

c) Correctional institutions 

Total preservation of the peace 

2. Preservation of public health — 

a) Against disease 

b) Against accident 

c) Against impure food 

Total preservation of public health. . . . 

3. Protection of property against natural agencies 

a) Against fire 

b) Against floods 

c ) Against animals and disease 

Total protection against natural agencies 

4. Regulation of industry — 

a) Transportation and exchange 

b) Grain and hay inspection 

c ) Bureau of labor 

Total for regulation of industry 

Total protection of life and property . . 
III. Promotion of efficiency: 

1. Public works — 

a) Transportation 

b) Forest reserves 

Total for public works 

2. Bounties and grants for industries 

3. Bureau of immigration 

Total physical efficiency 



4 391 



1.663 
0.699 

7-734 



10.096 

0.965 
0.072 
0.506 



I 543 

2.401 
1. 124 
0.516 



4.041 

0.797 
1.700 
o. 222 



2.719 
18.399 



0.667 
0.022 



0.689 

0.490 

O. 121 



1.300 



$1.95 



$1 



$1.20 
8.19 



•30 
.01 



$ .31 

.22 

■OS 



$ .58 



$ -35 



•13 
.06 
.61 



S .80 

.08 
.00 
.04 



$ .12 

.19 
.09 
.04 



$ .32 

.06 
•13 



i .21 
I 45 



■05 
.00 



$ .05 

.04 



S .10 



PUBLIC FINANCE AND TAXATION 833 

Payments of State of Minnesota in 1911 by Purposes — Continued 



Items 



Per Cent 
of Total 



Per 

$10,000 
True Val- 
uation 



Per 
Capita 



4. Education — 

a) In general 

h) University 

c) Agricultural schools 

d) (e) Normal and high schools 

/) ig) Common schools 

Total education 

5. Libraries 

Total schools and libraries 

6-7. Art, monuments, and recreation 

8-9. Compensation for injuries, pensions, etc 

10. Humane and charitable institutions 

1 1 . Unclassified 

Total for promotion of efficiency 

General maintenance and improvements 
rV. Commercial enterprises — 

1. Dictionary fund 

2. State lands 

3. Twine plant 

Total for commercial enterprises 

Total maintenance and improvements . . 

V. Interest paid 

VI. Paid on principal of state debt 

VII. Transfers, refunds, agency and trust fund pay- 
ments 

Total Payments 



0.087 

9-955 

1.822 

5.001 

18.125 



S -04 

4-43 

.81 

2. 22 

8.06 



34 990 

0.485 



$15 56 



35 475 

0.756 
1.926 
7.199 
0.028 



$15 78 

•34 

.86 

3.20 

.01 



46.684 
69.474 

0.017 
0.476 
6.662 



$20 . 77 
30.91 



2.96 



7 155 
76 . 629 

341 

6.923 

16. 107 



$3.18 
34 09 

•15 

3-o8 

7. 16 



$44.48 



5 .01 
.78 
•15 
■39 

1-43 



$2,76 

.04 



$2.80 

.06 
. I 

■57 
.00 



$3.68 
5 48 

.00 
.04 
■52 



$ .56 

6.04 

03 

•54 

I. 27 



$7 88 



834 



MATERIALS FOR ELEMENTARY ECONOMICS 



III. MUNICIPAL 

Receipts by Sources and Payments by Purposes, Measured by Per Cent 

OF Total, by True Valuation, and by Population. Fiscal Year 

Ending December 31, 19 11, or Date Nearest Thereto 

Class I Cities — Population above 75,000 

(Includes Minneapolis, St. Paul, and Duluth) 



Items 



Average Three Cities 
Class I 



Per Cent 
of Total 



Per$io,ooo 

True Valu 

ation 



Per 
Capita 



Receipts : 
I. Revenue receipts, as follows: 

A. General revenues — ■ 

a) From taxes (excluding special assessments) . 

From liquor licenses 

From all other licenses 

From fees, fines and forfeits 

From state grants for schools 

From state grants for armories and fire de- 
partments , 

From other grants and gifts 

From other general revenues 



b) 
c) 
d) 
e) 
f) 



h) 



41.8 
4.6 
0.4 

o-S 
2.0 

0.4 



f94-74 

10.37 

.98 

1.06 

4.61 

.81 



•05 



[4.72 
1. 61 

•15 
.16 

.72 



•13 
.01 



Total general revenues 

B. Commercial revenues — 

a) From special assessments 

b) From privileges 

c) From department earnings, rents, sales, etc. 

d) From educational institutions 

e) From public service enterprises 

/) From interest 



49 7 

8.9 



1.2 
o. 2 
6.8 
i.o 



$112.62 

20. II 

.00 

2.60 

• 44 

1537 

2-33 



$1750 

3-13 
.00 
.40 
.07 

2-39 
•36 



II. 



Total commercial revenues 

Total revenue receipts 

Non-revenue receipts as follows: 

a) From offsets to outlays 

b) From debt incurred during year 

c) From transfers, refunds, agency and trust collec- 

tions 



18. 1 
67.8 

o. I 
30-4 

1-7 



$40 . 85 
153 47 

.19 

68.83 

3-9° 



$6.35 
23.85 

•03 
10.70 

.60 



Total non-revenue receipts 

Total Receipts 



32.2 



$72.92 



$11.33 



$226.39 



$35 18 



PUBLIC FINANCE AND TAXATION " 835 

Receipts by Sources, and Payments by Purposes— CoM/mzreti 



Iteus 



Average Three Cities 
Class I 



Percent 
of Total 



Per $10,000 

True Valu 

ation 



Per 
Capita 



Payments : 
I. For maintenance, as follows: 

a) For departments — 

i) Government in general 

2) Protection of life and property 

3) Health and sanitation (including sewers) . . 

4) Highways and bridges 

5) Charities 

6) Recreation 

7) Unclassified 

b) For educational institutions — 

i) Public schools 

2) Library, etc 

f ) For public service enterprises 

Total for maintenance 

II. For interest (including state loans), as follows: 

a) On department debt 

b) On educational debt 

c) On debt for public service enterprises 

Total for maintenance and interest . . 
III. For outlays for permanent improvements, as 
follows: 

a) For departmental operations — 

i) Government in general 

2) Protection of life and property 

3) Health and sanitation (including sewers) . . 

4) Highways and bridges 

5) Charities 

6) Recreation 

7) Unclassified 

b) For educational institutions — 

i) Public schools 

2) Library, etc 

c) For public service enterprises 

Total for permanent improvements . . 
rV. Paid on principal of debt, as follows: 

a) Bonds (including state loans) 

b) Temporary loans 

c) Warrants of previous years 

V. Transfers, refunds, agency and trust payments . 

Total Payments 



2-4 

12.9 
4.0 

3-3 
1 . 2 

1-5 
o. I 

150 
1 .0 
4.0 



28 



45 4 

4.2 

1-4 
1.6 



$99 

9 
3 
3 



$15 



52 6 



o. I 

03 
4.6 

6.3 
0.6 

3-5 
0.4 

6.4 
0.2 
4. 1 



$114.94 



.02 

•75 
10. 15 
13 78 



■33 
.61 
.64 



14.02 

•52 

9.02 



$17.86 



.00 

. 12 
1.58 
2.14 

. 21 
1. 18 

. 10 

2.18 

.08 

1.40 



26.5 

1-4 

II .0 

6.0 

25 



$57-84 

3-II 

24.02 

13 23 
5 43 



$8.99 



3-73 
2.06 

•85 



$218.57 



$33-97 



836 MATERIALS FOR ELEMENTARY ECONOMICS 

IV. SUMMARY VIEW 

Section I of Table I gives total payments for all purposes, includ- 
ing transfers within and between governmental units. As a result of 
such transfers, it involves duplications amounting to some 40 million 
dollars. This is the method by which the sensational estimates of 
cost of government have been made, that have attracted considerable 
attention from time to time. 

Section II presents net payments, excluding transfers within 
governmental units and counting transfers between units but once 
— in the books of the organization which finally spent the money. 

This division of the table is of interest chiefly as showing the relative 
extension of functions of the several grades of government. It is 
significant and highly characteristic of the United States that nearly 
two-thirds (63 . 8 per cent) of the net expenditures were made by the 
local county governments, leaving only 12.4 per cent for the state 
and 23 . 8 per cent for the United States. 

These figures would seem to indicate that, while the ratio may 
be somewhat different in other states, the usual assumption that the 
federal government accounts for forty per cent of the total govern- 
mental expenditures is no longer tenable. Twenty-five per cent 
would probably be nearer the mark. 

Section III of Table I shows the net cost to taxpayers of all 
grades of government, as measured by total coercive revenues. Like 
section II this section excludes transfers within units, but unlike 
section II it also excludes commercial revenues and counts transfers 
between governmental units in the books of the grantor rather than 
the grantee, and then only in so far as paid out of coercive revenues. 
For example, the one mill school tax levied by the state is charged 
to the state, but the interest and other commercial income which 
forms the larger part of the state school apportionment is not included 
because it is not a charge to the tax payer. 

On this basis the local and county governments are chargeable 
with 57.5 per cent, the state with 16.4 per cent, and the federal 
government with 26. i per cent of the total cost of government. 

The total cost to the people of Minnesota is shown as 56.7 mil- 
lion dollars. This sum was $151.97 per $10,000 true valuation in 
the state, and $26.91 per capita (based on the estimated population 
of Minnesota in 191 1). It was also 23 .6 per cent of the income from 
the total estimated wealth of the state (Table D) at 5 per cent interest. 



PUBLIC FINANCE AND TAXATION 



837 





<c 




c 


h \C 







CO 


to l>- ■" 


M 






.0 V 




M2 w fO 0> g Oi 






■ (U 




6 g M w vci 




T3 


>0 " 


c: H 


d 


cj 


'i-i^'<: 


vo W T] 


1- ro "I I- c< 


t^ 


i-i 


t~- D«(S 


10 u« 


oo-S«* ft 


«» 





40. 











1^ 


Q. 






>o . 






< 


^8 


^8 


^8 ?? 






M *-* 


tt*" 


«» " 






m- 














„ 






CO -^ f 




5 Ol-(iOO M -W M 






?£" 


' <» g = 


" g 'r^ g ° 





^ 


" 


to. 


» " N o> 'J t^ 


I/-) 


a 




M 1.00 to fc,«^ 






■* S«s 


« M 4) 


«» 


a; 

■a 


oO. 


CT&«^ a 






lo 1^ 


«00 


^ H W 




(^ 




c^ ■ 


t^ . 






M ^ 


8- 


4>0 vo 






«» 


69. 


A 










^ 






00 -" oc 


C* ■4->CC 


o.w Mvo -y N 


0. 




goc 


TO C w 


cTo f. 0, a^ 
















O.U t- 


a U ir 


5 u <« ^ " rt- 


Tt 


V 


^ l.« 


!:■ ^^ 


1/1M H <N l,^ 


<© 


d 


00 u 


V 


to (U M (U 




00- Q. 


m" 0. 


^a«© & 




cJi 


go 


3;"^ 


to '^ ''' 






vo" ^ 


j;j 


cjo to 










«» M 






^ 


«* 


















fO-" f 




M -w o> 0> -WOO 


OO 




vo goc 
roU C 




h C too C3 t^ 





>. 







rO t- M 


N lH« 


%0 M t^ " l-«» 


«» 


c 


t^ 4>«(l 


IH i) 


>0 D«^ 1) 




3 



tCO. 


N 0. 


t^ft a 







00 i^ 




UT to ■* 
00 . 






hT ^ 


do 


wO N 






Tt '^ 


«©" 


e© " 






«© 










I^-*J 1/ 


) t^-w t~ 


■^t^J >/5 M -y 






t- a ly 


5 t^ £3 H 


M e Om^ C r~ 


't 




. V 


• V 


. 0^ . . <u . 




^_^ 


H <-> M 


M u r< 


.00 H On 


.<i- 


RJ 


10 u, " 


t^ n M 


t. to t>. t, M 




s 


•^ (L>«fi 


« u«S 


to « to il** 


«» 





00 a 


jtt 


a«» a 








vo N M 








r^ *^ 


r^ . 






tc">- 


\0 ^ 


•> " 






^f^ 


Tt "*J 


r. •* " 






«» 


«^ 


^ 


























.a 






























"3 




0) 0. 


























V 


2 


T3 


























S 


■H § 


























"d 


g 


T3 q_ 




























t 



























ol^ 


















-^1 

K 2 






g 


3 


>'T3 

t; 3 


















0) 3 









U C3 


















3 V 










a 






a 
.0 






1 






s-3 






1 



a 

E 


" 




1 


■3. 

3 

■a 
to 

a 
■3 
_2 

e 
fl 

1 


1 


'c 

rt 


Id 

1 

M 
C 

'•B 

3 

■ if 


■J 

c 


3 


(u'o 

as 

o.S 


_1 

1 

; 


c 
•.c 

z 

rt 
3 

> 

1 

5 

8 
^ 


"0 
o| 

IS C 

8 c 




60 

a 
■3 

_3 

1 

'S. 


rt 

til 

2* a 




-sst 


o-est 


° S S S « u "',° 


B 1 




i2<ia<&. 


*^<eiHP- 


■S<fceLi(i,PHrt^ 


UiSg 




. . 











H H fJ ^ 


:» ^ -^ vi\c 


t^oo 0> M N 


to 




'-' 






hH 






a 












> 


1 



3 (-1 



sg s 



>.2i 



i|.2S 

tC-- 3 -s 

o— !f 3 

" « ** « 

'o 'S c3 > 

1-1 O <J ^ >-• 

'"' '5 f; O 1> 

Ji^ as 

^ 3 hH 3 03 

^ §-S >>.s 

" <^ \] ,9 >■ 

•> a fc " M 

M-3 a g „ 



! !r! >• >• 
I aj nl rt 

I p:^ Ph Ph 



H CO 

g . "> " • 

E " t^> > 

>. u - '-' -s 

g_ „- ^ ^ _3 
"-I M XJ I 

<U - ^ M 

O K 3 O^- 
-^ 3 3 B 

§ So ft £ 



B=i 



^2 

00 'S 



ri- "^ 3 



VO to.S 



1) "rt a 

M (3 3 

o) '13 S vo 



rt _3 



'^ ^ M 3 '^ 

^ §ii 8- 

ja g f__ H 

■" O rt i5 3 

rt -a g -g o 

^ 2 -g s| 

^ 2 /2 -T' ca 
CL, -3 m ei, ►^ 



•o o> 2 N fd 

3 « ■H-'*; 

•^ jn la 3 

oj > tA a> .. 

-•a "> g?3 

a 2 "; 0) c 

« t* 

o tn f) 3 10 
S.2 !3 



"rt S) 3" g 

-, O S -2 a) 
■^ M > 3 >> 

V a ti ^ 4-f 

«D<i; o 



^ 



u 



e^ 



E S 



838 MATERIALS FOR ELEMENTARY ECONOMICS 

To this cost of government must of course be added the cost of 
subsidizing the protected interests, whatever that may be. 

Section IV of Table I gives the cost of all grades of government 
to a family of five persons in 1911, assuming that the head of the 
family was a householder or farmer owning real estate worth $3,000 
and personal property worth $1,000; and assuming, further, that the 
property was assessed and taxed at the average rates prevailing in 
the state after allowing the usual personal property exemption. 

The essential difference between sections III and IV of Table I 
is that the former includes, while the latter excludes, that portion of 
the cost of government which is defrayed by gross earnings taxes, 
liquor and other licenses, fees, fines and penalties. In other words, 
the head of this particular family did not own railroad stock, or con- 
duct a saloon, or become liable to fines or penalties. He was simply 
an average law-abiding citizen who paid direct taxes on real and 
personal property to the local, county, and state governments, and 
indirect taxes to the federal government. The question is, how much 
did he pay for these several purposes ? 

Accepting the rates of tax levy for different grades of govern- 
ment shown on the state auditor's abstract of tax lists, as indicating 
the division of the taxes paid, it appears that this citizen paid direct 
taxes as follows: to the local government, $24.41, to the county 
government, $6.08, to the state government, $4.59; and that he 
also paid to the United States government as indirect taxes $35.05. 
The total cost of government for the family of five persons was thus 
$70.13- 

In order to show more clearly the relations of these several govern- 
mental costs, the figures in section IV of Table I are embodied in 
several diagrams. In all of these the several segments of the circle 
correspond in size with the amounts shown in dollars and cents, 
while the figures on the circumference indicate what per cent each 
amount is of the total. 

Diagram i shows the amounts paid by the head of this family 
of five for different units of government, and the per cent which each 
is of the total. Over half the total went to the federal government, 
and most of the remainder to the local governments, leaving but 
15.2 per cent for the county and state combined. 

Diagram 2 shows how the $4 . 95 paid by the head of the family 
for state purposes was allotted to the various funds. This distri- 
bution was computed on the proportion of the total state levy of 



PUBLIC FINANCE AND TAXATION 



839 




rO H 






2 



1 2 

o- o 
"o ^ 



be cu^' 






-4^ c/: 



cd 



°- ^ « =1 i3 



-C 03 C O 



< M 

H 

H H 
U3 « 

r W 

o o 

O 
H 

n 



(X) ^ 



13 ni 



3 .5 tJ 

.2 ni 0, 

n! O > O 



>> a 



^ Z 



.E o 

2 tn 

D 



(n ra _, 

~ O 43 

IH " O 

•^ "3 >^ 

rt c 6 



4^ 

cd O 

•h O 

X % . 

M O ^ 

cd rv 

T3 *e tr 



2 O 

■■3 6 



2^ c 



l-H 

H 


oj 


Ui 


>. 


'^ H 


^ 


4J 


X5 


P4 z 




X! 




w 



rt 
^ 

^ 


C 
3 


t/3 

j2 


H 


60 

C 


1 

S 


^ 



a. o 



^ ti ^ ^ 



be Ci 



a H ^ 



840 MATERIALS FOR ELEMENTARY ECONOMICS 

3 . 88 mills specifically made for each fund. Unfortunately, time did 
not permit the further subdivision of these allotments. 

On this basis the amount which the head of this family of five, 
owning $4000 worth of property, paid into the state revenue fund, 
was $2.24, state school fund, $1.18, road and bridge fund, $0.30, 
prison building fund, $0.30, university fund, $0.27, campus fund, 
$0. 18, and soldiers' relief, $0.12. 

Diagram 3 shows how the $35.05 paid by the head of the family 
to the federal government was spent. This distribution was made 
in proportion to the net federal expenditures after offsetting com- 
mercial and other non-coercive receipts against the corresponding 
payments. 

On this basis national defense took $12 . 91 out of the $35 .05 con- 
tributed. Pensions claimed $8.87, public works, $4. 14, government 
in general, $3.19, debt and interest, $2.04, promotion of efiiciency 
other than by public works, $2 . 00, protection, aside from military, 
$1 . 50, and sundry, $0 . 40. 

It will be noted that after eliminating commercial and other 
non-coercive revenues and expenditures, as is done in this diagram, 
the expenditure for defense amounts to 36.83 per cent of the total, 
pensions 25.32 per cent, debt and interest, 5.83 per cent, making a 
total of 67.98 per cent chargeable chiefly to wars past and wars to 
come. 



PUBLIC FINANCE AND TAXATION 



241. TOTAL DEBT OF THE UNITED STATES, NATIONAL, 
STATE, AND LOCAL' 



TOTAL DEBT OF THE UNITED STATES 

LESS- SINKING FUND 

1870 



1902 



NATIONAL 
025,011,637 



STATE 
234,908,873 



COUNTY 
196,564,619 



MUNICIPAL 
1,387,316,975 



1890 



NATIONAL 
851,912,752 



STATE 
211,210,487 



COUNTY 
145,048,045 



MUNICIPAL 
744,239,610 



1880 



NATIONAL 
1,919,326,748 



STATE 
274,746,772 



MUNICIPAL 
706,847,166 



NATIONAL 
2,331,169,956 



352,866,698 



COUNTY 
187,565,540 



MUNICIPAL 

AND 

SCHOOL DISTRICT 
328,244,520 



' From the Special Report of the U.S. Census Office, Wealth, Debt, and Taxa- 
tion (1907), p. 135. 



842 



MATERIALS FOR ELEMENTARY ECONOMICS 



242. PUBLIC DEBT OF THE UNITED STATES, 1791-1911' 
(Figures are in millions of dollars) 



MOOOOOOOOOOO o 

OOiHO<fO'*i'5vOt^COO\0 M 

t— 00000000000000000000 On On 

MMHHHMWHHMHH M 



2,500 
2,000 

1,500 

1,000 

500 


















^ 




























u 


\ 


























\ 
























\ 




^ 






^^ 




-^ ^ 






I 














' ■ 








2,500 



2,000 



1,500 



500 



This table shows, historically, the amount of the public debt 
exclusive of legal-tender notes, gold and silver certificates, treasury 
notes, etc., and without deduction of the amount of cash in the 
Treasury. 

' The figures up to 1855 are taken from Plate IV of the U.S. Census Report on 
Valuation, Taxation, and Public Indebtedness (1884). Subsequent figures are the 
figures of "Total Interest-bearing Debt" as tabulated in the Annual Report of the 
Secretary of the Treasury. 



PUBLIC FINANCE AND TAXATION 



843 



w 


CQ 








r") 


Mm 


2; 













00 















1 












00 


















d d 


d d c 


d 


d 


d 








vo 


00 00 


■* 








ca 


M 


Tj q 


q> 0, 0. 




CJ 


vO 




I 


o" 


in 6 


M 00 


't 


■* 


"i 






■* 00 






t^ 


<^ 


^ 


-^ 


vO_ 0, 0^ 


to 


q. 


^-. 







vo" 


rO 00 


•* d^ d^ 


i-T 


hT 


>o 




rt 


M 


10 to "^ 






vo 

















O* 


0* 




«^ 










«» 










00 








8 










00 








2: 


c 


§■ 


9 
■* 


00 


d 


d 


8 


» 


g 




r~. vq 


0; "it 


VO_ 




CJ 


H- 1 


§ 
U 


ol 


m" C 


(vT 't "I 


M 


iC 


00" 


2 






N 5^ ^ 




00 


vo 


VO_ 


00_ VC 


to 


N 




00_ 






ro 


00 t^ 










1 




«^ 


HI Hi 


" 






«» 


g 
























Q 00 


d d 








8 

d 




1.4 







d 




d 



d 







s 


00 no 





Tf 






to 


t^ rri Tt vp 






r-. 




"tn 


0" 


to d 


Oi 10 00 


cT 


tC 


r>. 




'S 




w t^ 


r^ in 





00 


to 




>o_ 


M 00 


vo vo q> 


q. 


00 


00_ 




l2 


<^ 


in d 


^ a 00" 


hT 




to 




^ 


tj- C 


m N to 












>o 










Ov 






«© 










«© 










§. §. 8 











Q 





C 











H 














t) 


d 


d 




d 


d 


d 






vo 


■§, 80 


1- 


00 








vo r 


HI 


a 




l-H 


0" 


cT li- 


M d^ d^ 


tf 


•* 


d> 


H 




Ov M 


to 00 










i~. to >o 00 


to 





to 


K 


vo" 


00" n' 


Ti- 00 


t^ 


^ 


■* 





■* 


Ov vO 


m to m 








<! 


S 










M 


H W 


< 


s ^ 


<' A ^ 


>^ 


c 








1-^ 


[J < 


S' <^ S^ 


■3 


C3 






M >< 


d 


A ^ 


fe So 


d 

ca 


3 






r 




r - - 


i-i 


1— > 








»—» 


<i fe 


Z fa c/i 










s 

n 

a 3 

w <: 

S5 

PJPh 
u 


.s 


^ - 




-^^ 


. . 






_. " 00 . 

■- 1- " fe 


- vO - 00 IH 
to to^ 

;o 'rtvo<'rt0o;52, 


"i i> c 

lis 

^T3 

. e 
-0 p >, 


'" to 
to 

c 
4) ta HI 
3 i-> 

Z ^ a 






>.2''a2'>.>.2' •o2'>>T3 2'>.>. 


la -S « >• 








(2 






■Hi 


^ ^ (£ 














' ' V • 










vo 




n 












Oi 













00 1 


vo 00 ■-. 


1 


to 









0> u- 


M 


HI 








o> 


00 Ov o> o> 




Ov 






^^ 




M OC 







HI 






































« 


e c 


c c a 


e 


a 








0^ 


V u 


(U U V 


V 








H 


u 





u 00 


u 


u 






H 


IH 


M k4 






l-l 






< 


a> 




s mi) 


lU 








Pi 


a 


0. a Q, a a 


a 


a 
























N 


to rj- N tM f/^ 


M 


IN 












-§ "§ ^"" 










H 














U 






> rt rt _o im 










< 
2 


8 




00 ^ gO ggfag 
















■^ 




"" ""&g 










OJ 


'-' 


r^ >> 00 '"'' 00 "^^ '^. 'J- 


in 


in 









JI! 


*^ c 


w u N u io2 

3 3 5 


HI d 


n 











c 


s s 


C 








S 


3 rt 


3 


3 






< 


1— 1 I-, i-» 1— 1 <t; 


1— I 


1—1 















^% 




•0 




i.s 




% 




06 


c3 


a ^ 




BXJ 




"o <a 

sax 




< 



H 


d 



"o 


Oi 

M 

1 

00 1/ 

<v 

01 c 




^A 

Ci vo 00 HI 
^ C M 

rt Ov Ov Ov 

>- U " HI H, 


c . 

C/3 _ If 




V3 1 ^ 










"0 "c 
d c 






-H* 0> 


< 


H 


c 



§ ? 


c c« cA c« 


" •" 








U 


J ,- 


3 Oi 


Hi 




Oh 






1 



fe 



844 



MATERIALS FOR ELEMENTARY ECONOMICS 



^ 



o 


o 


o 


o 


OvO 


o 


, 


o o 


o 


O O <N 


ci 


d 


o 


d d 


d 






O r-cK 




q_o 




•*</1M= 












li? CO fO O ^ PO i o 1 






O M 


. in 






t^ CIO 1 


» 






£ 




























^ 
















cc 
















































>> 














t- 
















rt 
































c 
















wi 
















l-> 














c 
































-4- 

c 
















i 
































CT 












(L 






o 








1 




w 














oo" 














w 




























3 








X 






bjo 














3 














< 








.c 






"O 








rt 












> 






1 




















t: 






m 








i 




















»^ 












1 








s 






























8, 








J2 
T3 




H 








'o 




oo" 






















£ 






E- 












§ 








Ut 




1 








o 'H 


a 








"g - 










C3 cd 










00 o 


IH 










O 










M 










H 'm 


i 








>, % 










t-^ C3 




• 






3 o 
13 CO 


+j" 








rt n) 


^ 




t^Pr*"" -^ 


^t 




g|2 1^ 


si 

0.£ 


c 


.^^•s, .a 


M ' 




il 


£ 




II 


-1 


00 oc 






c 


1- 




(U Q. 


<u e iJ 


XI -c 


c 


T3 §-0 


a c 




S"*^-" 


(I 




< 


£ 


^ 


o 


1 















1 


, 


O lo o <? ■* 


\0 N MS c> 1 -t 1 


M >n o o 


1 °° 


0_ H 00_>O 




H CO <^ ■4- 1 h' 1 


00 in CMo 1 00 1 


M3 q_oo 


0. 


\0 <NVO 


v-t 


-* <M 


'^ 




fO 


««■ 


«» 






H<2 




























■*H 










>» OJ 










"3 1= 










•^^ 










t«^ 








""o 






























cJ W 










..< 










-o_ 










73x1 










"o >• 



















+J t- 










a -5 










l-S 










t^ u 










• — c 










3 










D-lr 










2ii 










s ^ 




















'3t3 










as 










OJ c 










_o.£ 






























bc» 










B «J 


















0^ 








"S 








."''? 


















* OC 










m«» 








g 0- 






to 








o 


4) 1 






00 


.aT 






CO 








3oc 






J3 


bjo" 






c^ 


•c° 






1 


2« 




^^ 


.Q C 






\oo Id'"' 




0000 CJ . 






w " t: ^ 


5 




- - s >c 






H « OC 






H H c/: M 




cd 






>. >> 






.^E? -o "> 




3 d u . 






862; J 

Febru 

includ 
Marct 
















- M ^ 






•n-o 0.0 




NOO 0000 




>> " " " 










!3 tC t?r» 




a M H H 




£_>. _>>>. 










u'a "33 




toi— > H- ,1— , 












M 












cd 












u 












J3 
























.J^llli 






;;''3 


4) S 


S 


^§> 


13 t, 


S <n C- t. 


"o 


o£ « a F 


(U— ■ 


ates r 
nd no 
Bank 
mptio 


« 60 

fe.a 

60 
< 


ted St 
dema 

tional 
Rede 

rtinna 


qi'o cd ?: 






C 


:z; 


tu 




1 









8 




8 








v 




d 











ri 




CO 


CO 




















i-i 






w 








Hi 




» 
















































c 










« 






\f 


» .0 1 




cS 
0) 








■0 


^ 


° 




i-i 





















CO 1 CO W 1 













" 






(-H 








10 t~ 1 










^> 1 


'^ 






Ovo 


1 









N -;)• 1 >0 







CO 












d a 01 




S 


H t^ 00 


VO 






<5 q. O; -* w 1 




- 


d" fC li^ w 1 






O^o r< 


o> 




CO 


r-.vO^ H 


1 ■* H 1 




>. 






■ V? 




0! 


t-. 1 •* vo 1 




s 


O CO 1 CO in 

^ 1 „- M 1 








<» 






O^O 


u 







CO 


q « T 1 vo 







d d ■* ■* d, i 







M lOOC 


^ VO 






0^10 >' 


5 >- H 1 














0" 


vo d! H 


t> t~ 1 




>ooc 


^ CO 




CO 


iivOO 





. =? 







in m" <o 1 fO N 1 




3 


so t^ •t t^ 




3 


0. CO 1 CO K 1 




l-» 


«» 


H 


" 1 








" J 














>> 




























3 














1 




























H 














J3 




























3 




























ja 














t« 














tj 

























































d 












X 


3 



























X 


a 




3 








t> 


1 a 













c 










>■ 


•c 


"a 




ni 






C« 


3 








*C 




o" 




a 




3 


X 


V 








•*- 


3 




tcj 




a 

8 


I 


r3 









<t 


J2 








.3 


_c 


^ 










"c 


s 








X) 


c 


w 








a 













to 


X 

c 


8 










■s 








to 


t 


3 








•*4. 


! 


E? 








■h; ? 




3 








.£ 

a. 


i 






60'" C 


ol 






"Cy 6 


« 
I 






S-3 c 


t 








J2 & t 


t 


4^ 






«!> a 1 


< 


cd 






S °-^ 




a 






I-, -M ■,- 








1 
1 




X 

1. 

C 




u 



PUBLIC FINANCE AND TAXATION 



845 



10 MOO eoo o» 
oo\o ''t "0 f^co 


4 


00 00 


fO fC ■^ <N (^ rO 
t^ CO 10 H i'^ 


•t 


00 Ti- 
00 
10 -t 


"t t^ •* wo 


VO 


tS 



00 N 



>O00 

no" 

10 C7> 



CtH-4 tn 2 o rt 
CS O-ii m a M g 

, S"? E e fS s s 
3 S rt u &.- c ^ 

^<3 y o o c rt rt 

a-t-i Gt 'i^ rt O O 



IB 

p 

'goo 
i^-ti *-> 

^ u g 

ana 
S Si =« 

CpQo 




<N 


8 








n 


r^ 





a 


W500 





Oi 











t^ 






to M 





(S 












ID 


•* 


N t^ 















000 


0. 


I^ cs 







■*»O00 


"; 


« 







VO 


TtOO 







IH 


r^ 




n 


irj 





000 





on 


0. Oi>0 


l/l 







o> 


■* 


VOOO 









to 


t^ 






00 


"5 




(J 


!«500 


a rOOO 






« 


vO 


■*io to 



tl- >o 


moo to to 


tn 


<^ 


N 00 o> 













tj- 10 ts Tj- 


to 










-fn 


O 






^ 




° "^ 0, 






846 



MATERIALS FOR ELEMENTARY ECONOMICS 









o 


c 




VO 








t^ to 


O 


q 


o 


q 






tt "o 1 


d>o 


d 


a 


^ 








5 V, 


VO c 


o 


VO 








^ 1 N 1 


H C 


o 




>o 






oc 




















t^C 


~ o 


tN. 








VC 


WS 


w ir}^G 


to 








Ov 1 00 1 


t^ i/^vO 


O; 








to 1 O 1 


















O ^ IS 




•o 








H 


00 00 




VO 






Oi 1 to 1 


° "* 












o 






^ 








^ 1 c; 1 


^ 




«* 










|6^ 










■ l^ o 
















■ -to 
















• in 6 
















■ to o 
















•oc 


o 
















:y: 


"o" 
















o>o 
















• "^ 0. 


















o 
















: ^"^ 


















M 
















\^» 


*3 














'■ 




1 o 














u 




Sb 














> 




H 3 






1 , 

Hi 


■S 
c 


1 I 


< 

< 


o 

1> 

Si 

-° " 

11 

li 

m a. 
0) c 
■X3 J 




so g 

II 

hi) O 






Hi 


1 .sS 


fl 


^1 

>** 


c 






o " g 


ra ,. tfl • O 


J 




!5 " t 

<T3 t 


(-1 "^ 


3 8 wg fl ^ 




gOc? 










o 


C 




O 


o of- 






o c 


O O 





to O 


to 


O 


o o a 


c 


lO C 







t^ Cn 


0.0 


Ov >o c 





xri 


■* <s 


« O 


VC 




r> C 







00_ r- 


1 M o C 




to CO 


in 


t-T u 


? tC o'c 


t^ cS bo 


VO 




^ w i^vc 


to ^ O 


00 


t "^ 


1^ i/^vC 


0> H CO 


O- 
















t^ c 


^ >o to « 




00 C 


" 




00 c 


h 0000 


S. O w 


■> to 


00 H 


0_ "S- 




:i to M 


q. 


«© 






- «©■ «© 






«^ 


^ 






«» 




















> 






















M 




















9 


w 




















H 




















H 










t: 










< ^ 


















.S 


Q 




























o 


•- 




__ 














a 


\ 1. 

> 








1 


S 








"o 


c 








^ 




a 


322 




§ e 


g 


c 


i 






►J !. 


w c 


J2 


o 


gT3T3 

g'o'o 


p V V 


o 


OJ n 


2 


a 


H_>_>; 


H 


wt 


R'o 


"o 


goo 


coc?5 




§^ 


go 


O 


m 


u 












O 




o 




O 


1 




PUBLIC FINANCE AND TAXATION 847 

244. TOTAL AND PER CAPITA NATIONAL DEBT OF 
DIFFERENT COUNTRIES' 



Countries 


Total Debt 


Per 

Capita 
. Debt 


Countries 


Total Debt 


Per 

Capita 
Debt 


Argentina 

Brazil 


$ 670,428,000 

663,667,000 

474,941,000 

636,822,000 

6,283,675,000 

1,219,430,000 

3,705,754,000 


$ 9? /18 


Italy 


$2,669,748,000 
1,271,745,000 
219,213,000 
4,604,945,000 
23,614,000 
3,527,270,000 
1,027,575,000 


$ 76.97 


67 

I 

158 

18 

57 


43 
06 
90 
67 
78 
08 


Japan 


25.06 

14-50 

27.72 

6.29 

77-75 
10.61 


Canada 

China 

France 

German Empire. 
German States. . 


Mexico 

Russia 

Switzerland .... 
United Kingdom 
United States. . . 



245. PRINCIPAL SOURCES OF FEDERAL REVENUES BY 
DECADES, 1800-1910 




246. THE ADEQUACY OF THE CUSTOMS REVENUE SYSTEM^ 

In order to attain perfect adequacy the government needs must 
always be met by revenue both as to time and amount. Now under 
the ordinary circumstances, expenditure — the measure of government 
needs — is reasonably uniform from year to year. Income must, 
then, ordinarily be suflBcient, but no more than sufficient, to satisfy 
this uniform demand. As, moreover, government demand rarely 

' From Statistical Abstract of the United States, 1912, pp. 804-6. 
^ Adapted from Robert F. Hoxie, "Adequacy of the Customs Revenue System," 
in The Journal of Political Economy, III, 42-72 (December, 1894). 



848 MATERIALS FOR ELEMENTARY ECONOMICS 

varies with the variation in industrial and commercial conditions, the 
revenue should also be derived from a stable source. Further, as 
the very nature of government operations constantly expose it to 
sudden and unforeseen expenditures, it follows that the public income 
should possess a high degree of flexibility. Sufl&ciency, stability, 
and flexibility are then the principles of fiscal adequacy. Definitely 
stated, sufficiency requires that the income be ordinarily commensurate 
with the demands of government; stability, that the income resist 
all forces, not of governmental origin, tending to make it vary; and 
flexibility, that it be capable of accommodation, with precision and 
rapidity, to changes in the government demand. 

[The detailed study of our financial history which forms part of the original 
article is here omitted. The following summary, used in connection with the 
chart, will make clear the conclusions reached by the author. — Editors.] 

In the historical survey a variety of national, industrial, and 
commercial conditions have been encountered, yet the testimony 
throughout is strikingly in accord. In the first period examined, 
1 789-181 2, while the nation was yet in its youth, and subject to 
strong foreign influences, the customs revenue, though on the whole 
abundant, was found to be uncertain to such an extent as rendered 
it an extremely precarious base on which to place the public finances. 
In the second period, 18 12-16, under the stress of foreign war, the 
financial policy based upon the customs revenue system utterly broke 
down, as a result of the insufficiency and inelasticity of this form of 
income. The generally favorable conditions of the third period, 
1816-35, while accompanied by a redundancy of revenue, did not 
insure the nation against great instability of income, resulting from 
transient industrial disturbances. The fourth period under examina- 
tion, 1835-43, furnished a striking illustration of redundant customs 
revenue both as effect and cause of speculative expansion, and of the 
extreme instability of this form of revenue in time of acute commercial 
crisis. In the fifth period, 1843-60, under remarkably favorable 
general circumstances, the customs revenue, though on the whole 
abundant, still proved extremely sensitive to industrial and commer- 
cial disturbances. The Civil War period, 1860-69, served only to 
illustrate on a larger scale the defects of the system that were found 
to characterize it in the War of 181 2. And finally, in the full vigor 
of the nation, and in time of average prosperity, 1769-93, this form of 
revenue was found to be alternately, according to the transient 
character of industrial and commercial conditions, greatly in excess 



PUBLIC FINANCE AND TAXATION 



849 




850 MATERIALS FOR ELEMENTARY ECONOMICS 

of and far beneath the income necessary for the support of the financial 
operations of the government. 

It will be seen that two factors are common to all these periods, viz., 
redundancy of revenue in time of commercial and industrial activity, 
and insufficiency and instabiHty of revenue in time of stress and depres- 
sion. On the whole it may be asserted, without fear of contradiction, 
that, throughout the history of the customs revenue system in the 
United States, the income from this source has been determined, not 
by government need but, almost wholly, by the character of temporary 
industrial and, more especially, temporary commercial conditions. 
As a consequence, in war the current public income has proved utterly 
insufficient, unstable, and inflexible; in peace it has shown itself 
extremely uncertain, fluctuating with every crisis and even with the 
changes in the poHcy and condition of foreign nations; in times of 
prosperity it has forced upon the treasury embarrassing surpluses, 
leading to extravagant expenditure, speculation, and crisis; in adver- 
sity it has left the treasury empty, necessitating the lavish use of the 
pubUc credit. Judged purely by these results, as a main source of 
national income, customs duties must receive almost unquahfied 
censure, compared with which the aspersions against it as a cause of 
individual injustice are trivial, and it should at once be discarded or 
essentially modified. 

However, the foregoing discussion has not been exhaustive enough 
to justify the rendering of a general verdict. The questions, whether 
any peculiar circumstances have accompanied the employment of 
the customs revenue system in the United States and, if so, whether, 
and to what extent, these circumstances, non-inherent to the use of 
the customs revenue system, have contributed to its unfavorable 
showing, are still before us. 

A review of the general conditions existing in the United States 
since customs duties first became the national revenue system reveals 
no peculiar circumstances operating against the successful employ- 
ment of this course of public income. On the contrary, the general 
conditions have been remarkably favorable. Vigorous national 
growth, rapid industrial and commercial expansion, and great accumu- 
lation of wealth have characterized the period. The isolated position 
of the country and a conservative attitude toward government enter- 
prises have combined to render national expenditures on the whole 
moderate. Customs duties, moreover, have been used to provide 
only for federal expenditures, the states being expressly forbidden 



PUBLIC FINANCE AND TAXATION 851 

by the Constitution from placing any duties on imports. And finally, 
the people, upon whose approval the success of any system of taxation 
under a democratic government must ultimately depend, have 
regarded indirect taxes with peculiar favor. The failure, then, of 
the customs revenue system to conform to the requirements of fiscal 
adequacy cannot be regarded as a result of the general conditions 
found in the United States in the past century. 

This conclusion granted, there remains but one other possible 
source from which circumstances might arise unfavorable to the 
success of the system, viz., the financial operations of the govern- 
ment. Here, indeed, two peculiar and unsatisfactory features are 
found to exist. They are, first, a faulty financial organization; and 
secondly, a continued administration of the customs revenue system 
for economic rather than fiscal purposes. That these features of 
American finance have been responsible, to some extent at least, for 
the unfavorable showing of the customs revenue system in the United 
States cannot be questioned. 

The particular feature of our financial organization that has 
unfavorably affected the customs revenue system is a division of 
powers and responsibilities in the construction of the national budget. 
There is in our government no single eye that surveys and no single 
responsible head that dominates the budgetary operations. The 
financial estimates are, indeed, prepared under the supervision of one 
person — the Secretary of the Treasury. But, this operation completed, 
his power and his responsibility pass over into the hands of the legis- 
lature. There is a positive line of separation between the executive 
and legislative departments. The Secretary of the Treasury may 
recommend, but he cannot enter the legislative chamber to explain 
or defend his position. Congress has unlimited power to add to, 
or take from, the estimates and to establish whatever taxation it may 
deem proper. The financial measures, therefore, in fact, come from 
the legislature itself. But even in the legislature, working by means 
of committees, expenditure and taxation are not considered together 
as forming one problem; and further. Congress is composed of many 
individuals, with widely differing financial abilities, influenced mainly 
by other than financial motives. 

The second peculiar feature of American financial operations is 
the predominance of the protective idea in the shaping of the revenue 
system itself. The attempt to foster home industry by means of high 
duties on imported merchandise is not, of course, a novel feature of 



852 MATERIALS FOR ELEMENTARY ECONOMICS 

financial legislation, but in the United States fiscal considerations have 
been pretty systematically subordinated to the protective aim. 
This result has been due mainly to three causes: first, the faulty 
financial organization already discussed, which places fiscal manage- 
ment in the hands of men dominated, to a great extent, by political 
and economic motives; secondly, the great wealth of the country 
which, rendering pubUc borrowing easy, and enabling the nation to 
recover rapidly from the effects of financial blunders, has veiled the 
real importance of fiscal considerations; and thirdly, the presence, 
during almost eighty years of our national history, of a pubHc debt 
readily absorbing surplus revenues. 

The discussion of the peculiar circumstances affecting the customs 
revenue system in the United States has, then, considerably modified 
the broad general conclusion dravvn purely from the historical exami- 
nation. But, though the scope of the general conclusion has been 
narrowed, and has been rendered also somewhat equivocal, this 
discussion serves only to confirm in all its force the practical con- 
clusion that the customs revenue system should be either discarded 
or essentially modified. It has shown that not only is the revenue 
system in itself essentially faulty, but that the incidental causes of 
its inefficiency in the United States lie too deep in the structure of 
our government and in the character of our people to be easily eradi- 
cated. It will take much time to displace the financial methods 
sanctioned by a century of use, and still longer to convince the people 
that the tariff is not essentially bound up with the protective policy. 
It may be assumed, then, that the results to be derived from the con- 
tinued use of this revenue system will be as unsatisfactory in the 
future as in the past. But the effect upon the prosperity of the nation 
cannot but be even more disastrous. As we approach European 
conditions, industrial enterprise becomes more sensitive, and our 
ability to recover rapidly and easily from the effects of financial 
blunders grows less. It is imperative that the national revenue 
system in itself be made more flexible and more stable. It is for us 
to consider carefully what measures — whether the introduction of the 
income tax, or the extension of the internal revenue duties — ^will bring 
about these results. 



PUBLIC FINANCE AND TAXATION 853 

247. SOME GENERAL DIFFICULTIES IN OUR STATE SYSTEMS 

OF TAXATION' 

What, then, are the chief difficulties in our tax system which 
are coming more and more to be recognized everywhere through- 
out the length and breadth of the land? I should sum them up 
under eight heads. 

First and foremost is the breakdown of the general property 
tax, which is almost everywhere still the chief reliance of state and 
local government. The general property tax works well only amid 
most primitive economic conditions for which alone it was calculated. 
Almost everywhere, for reasons which it is unnecessary here to re- 
capitulate, and which it is utterly impossible to prevent, personalty 
is slipping from under. The administration of the general property 
tax is everywhere attended with increasing difficulty, and in our 
large industrial centers it has become, to use the words of a recent 
tax report, "a howling farce." Everywhere, north and south, east 
and west, although in varying degree, comes the cry that the attempt 
to enforce the general property tax, whether by listing bills or tax 
ferrets, by oaths or by inquisitors, is doing much to force upon the 
average citizen habits of falsehood and corruption. 

Second, a growing lack of equality in tax burdens, not only as 
between classes in the community, but as between individuals of the 
same class. Where land, for instance, is assessed at 20 per cent of 
its value in certain counties, and at 80 per cent or 100 per cent in 
other counties, it is obvious that the contribution to the state tax 
is grossly unequal and unfair. 

Third, the application to general purposes of what was intended 
to be only a local revenue. All direct taxation was originally local 
in character, and the assessment of property for local taxation was 
at the outset a comparatively simple matter. When the need for 
state revenues made itself felt, it was obviously expedient to tack on 
to this local taxation a quota for general purposes. But with the 
great development of state functions, and with the breakdown of the 
local barriers of commerce and industry, what was originally equal 
soon turned into inequality, and the attempt to fetter interlocal 
or even interstate business conditions by the bonds of purely local 
assessment has proved to be a fruitful source of difficulty. 

■From E. R. A. Seligman, "The Separation of State and Local Revenues," in 
Slate aiid Local Taxalion, Addresses and Proceedings of the First National Confer- 
ence of the National Tax Association (1907), pp. 486-89. The Macmillan Co., 1908. 



854 MATERIALS FOR ELEMENTARY ECONOMICS 

Fourth, the failure to make modern corporations bear their 
fair share of taxation. The corporation is a growth of the last half 
century. It was unknown when the present framework of our tax 
system was established. The attempt to force the new wine into 
the old bottles is not only spoiling the wine, but cracking the bottles. 

Fifth, the failure to secure adequate compensation from indi- 
viduals and corporations alike for the franchises and privileges that 
are granted by the community. An earnest effort is being made at 
present throughout the length and breadth of the land to repair 
this defect. But with the historic system as it has come down to us 
in this country of estimating wealth in terms of property rather than 
as abroad, in terms of income, we have been plunged into the vortex of 
the assessment of franchises, and have thus been compelled to attack 
a problem which does not even exist in other parts of the world. 

Sixth, the undue burden cast upon the farmer. Practically, 
this is the problem of taxation in many of our rural districts and in 
all agricultural communities where the failure of an adequate revenue 
system and of the readjustment of social resources makes it impos- 
sible to secure good schools or fairly decent roads without over- 
burdening what is, after all, the chief source of American prosperity. 

Seventh, the interference with business, due to the partial and 
spasmodic enforcement of antiquated laws. Witness the attempt 
in some states suddenly to levy the mortgage tax, as recently in New 
York, where the entire building industry was thrown into confusion; 
or the attempt in other states to enforce now this and now that kind 
of property tax on businesses which led to a change in the location 
of the business rather than to any increase of revenue. The harassing 
of the individual business or the fear of harassment is becoming less 
and less defensible in the delicately adjusted mechanism of modern 
business society. Over a century ago Alexander HamiFton, in his 
famous report on manufactures, stated this golden maxim: "All 
taxes which proceed according to the amount of capital supposed 
to be employed in a business are inevitably hurtful to industry and 
are particularly inimical to the success of manufacturing industry 
and ought carefully to be avoided by a government which desires 
to promote it. It is in vain that the evil may be endeavored to be 
mitigated by leaving it, in the first instance, in the option of the party 
to be taxed to declare the amount of his capital or profits." 

Eighth, the failure to make great wealth contribute its due 
share. In former times, where property was fairly equally dis- 



PUBLIC FINANCE AND TAXATION 855 

tributed and conditions simple, inequalities in tax burdens were 
slight and unperceived. Before the huge aggregations of modern 
wealth, the crude tax machinery of earlier days stands impotent. 
And yet we hug ourselves with the delusion that all that is necessary 
is to patch up the old machinery, whereas what is really needed is 
to throw the old machinery on the scrap heap and to utilize entirely 
new and modern instruments and processes. 



248. A SYSTEM OF STATE AND LOCAL TAXES AND THEIR 
APPORTIONMENT' 

In few states, if in any, are the different grades of government 
so intimately related to one another as in Minnesota. Whatever 
may be thought about it as a matter of administration, this inter- 
relation greatly complicates the problem of securing a consolidated 
statement showing the cost of all grades of government in Minnesota. 

The financial relations between the state and other governmental 
units are especially complex, as will appear from the following tabular 
statement: 

I. The state collects directly: 

(i) Gross earnings taxes on railroads, express, freight, and tele- 
phone companies. 

(2) Gross earnings taxes on interurban electric roads. 

(3) Ad valorem taxes on telegraph and sleeping car companies. 

(4) Two per cent of gross insurance premiums. 

(5) Three cents per net registered ton of vessels navigating inter- 
national waters. 

(6) Mortgage registry taxes on property not subject to ad 
valorem taxation. 

(7) A great variety of licenses^ and fees. 

(8) Payments for trespass on state lands. 

(9) Purchase price of stumpage sold. 

(10) Exploration fees and royalties on mineral leases. 

(11) Inheritance taxes on property in Minnesota transferred by 
non-residents. 

' From the Third Biennial Report of the Minnesota Tax Commission (191 2), 
pp. 248-51, 579-81. 

' Including fishing licenses and non-resident hunting licenses. 



856 MATERIALS FOR ELEMENTARY ECONOMICS 

2. The state receives from the United States: 
(i) Grants for state university. 

(2) Grants for soldiers' home. 

(3) Five per cent of cash land sales in Minnesota. 

3. The state receives from the counties: 

(i) Inheritance taxes, except from non-residents. 

(2) All other state taxes, except as shown under paragraph i . 

(3) Court forfeits. 

(4) Principal and interest for state lands. 

(5) Ninety per cent of hay and pasturage rentals. 

(6) Ninety per cent of resident hunting licenses. 

(7) Principal and interest for state loans, unless paid directly 
by district or municipality. 

4. The state receives from all municipal corporations: 
(i) Two per cent of liquor licenses.^ 

5. The state pays to counties: 
(i) Half of the vessel taxes. 

(2) The state apportionment and special aids for schools. 

(3) Five cents per acre of state lands for school maintenance. 

(4) Certain grants for roads and bridges. 

(5) Bounties relating to wolves, horse thieves, and timber plant- 
ing. 

(6) A proportionate share of gross earnings taxes from inter- 
urban electric roads for distribution to other civil units. 

(7) Ten per cent of inheritance taxes collected by same counties. 

6. The state pays directly to cities and villages: 

(i) The two per cent tax on gross insurance premiums unless 
there is a duly organized firemen's relief association. 

(2) Two hundred and fifty dollars per company toward armory 
maintenance. 

7. The state pays directly to firemen's relief associations (where 
properly organized) : 

(i) The two per cent tax on gross insurance premiums. 

8. The state pays directly to each company or battery furnishing 
site: 

(i) Ten thousand dollars for armory construction. 

' Laws 1907 c. 288, Sec. 19. 



PUBLIC FINANCE AND TAXATION 857 

In addition to acting as collecting agent for the state, as indi- 
cated under paragraph 3 above, the county has most intimate finan- 
cial relations with all local governmental units, as may be seen from 
the following summary: 

9. The county receives from municipalities, except from cities of 
10,000 or more population, 10 per cent of liquor licenses. 

10. The county pays to townships: 
(i) All taxes levied for their use. 

(2) One-half of liquor licenses collected within such townships 
(all of such licenses in counties over 275,000 population). 

(3) Occasional grants for roads, bridges, etc. 

1 1 . The county pays to school districts : 

(i) State apportionment and aids for schools. 

(2) County apportionment for schools. 

(3) Local one mill and special school taxes. 

12. The county pays to cities and villages: 
(i) All taxes levied for their use. 

(2) Many special assessments. 

(3) Occasional grants for roads and bridges, etc. 

13. The local board of underwriters in each municipality also re- 
ceives directly from foreign insurance companies 2 per cent of 
the gross premiums for maintenance of salvage corps. 



The levying and collection of the property taxes serve to illustrate 
the complexity of the situation. The law provides that all taxes 
shall be levied or voted in specific amounts, and the rate per cent shall 
be determined from the amount of property as equalized by the tax 
commission each year, except such general taxes as may be definitely 
fixed by law. 

Five different official bodies have to do with fixing the amount 
of the tax levy each year — the state, the county, the town, village 
or city, and the school district. 

The state rate for general revenue purposes is determined by the 
legislature and may vary from year to year according to the needs of 
the state, the levy for such purpose this year being i . 9 mills. The 
total state levy this year for all purposes, including the one mill 
school tax, is 3 . 88 mills. 



858 MATERIALS FOR ELEMENTARY ECONOMICS 

County taxes, except as otherwise provided in case of counties 
having more than 150,000 population, are levied by the county board 
at its meeting in July of each year, and are based upon an itemized 
statement of the estimated expenses for the ensuing year, which state- 
ment must be included in the published proceedings of the board. 

City and village taxes are determined by the local authorities 
in accordance with the methods prescribed in their charters. 

The amount of taxes to be raised for town purposes is deter- 
mined by the voters at the annual town meeting. 

School taxes, except in districts organized under special laws, 
are determined by the voters at the annual meeting. 

The amounts of the different taxes so determined must be certi- 
fied to the county auditor on or before October 10 of each year. The 
county auditor then computes the rate necessary to produce the 
required revenue and makes the levy accordingly. 

There are, however, certain limitations on the amount of taxes 
that may be levied for different purposes in any one year. 

Except where county commissioners, township supervisors, or 
corporate authorities of any city, town, village, or school district 
are authorized by special law to levy any tax, the amounts that may 
be levied are limited as follows: 

Counties whose taxable valuation is $1,000,000 or more, may not 
levy taxes in excess of 5 mills for general revenue purposes, and 
counties having a less valuation not in excess of $5,000, or exceeding 
a rate of i per cent. 

Town taxes for revenue purposes shall not exceed 2 mills where 
the valuation is $100,000 or more, nor more than $150 where the 
valuation is less than $100,000, and then not to exceed one-half of i 
per cent. But towns may levy taxes for roads and bridges not to 
exceed 10 mills on the dollar, and for support of poor not in excess of 
5 mills on the dollar. 

School districts, in addition to the general i mill tax, may levy 
a tax not in excess of 15 mills for support of schools and i per cent 
for erection of school houses. 

THE COLLECTION OP PROPERTY TAXES 

The county auditor computes the rate of levy necessary to pro- 
duce the aggregate amount of money required by the four separate 
taxing authorities, and extends the tax against each description of 
land and each individual assessed for personal property. 



PUBLIC FINANCE AND TAXATION 859 

The auditor makes a separate tax list for each taxing district 
of the county showing ownership and description of property, with 
columns for the valuation and for the various items of taxation 
included in the total. 

The tax lists are turned over to the county treasurer by the 
auditor on or before the first Monday in January of each year, and 
the treasurer proceeds to receive and collect the taxes therein levied. 

On receiving the tax lists from the auditor the treasurer, if 
directed by the county board, is required to give three weeks' pub- 
lished notice in a newspaper, specifying the rate of taxation for all 
purposes, and the amounts raised for each specific purpose. He may 
also be directed by the county board to visit different places in the 
county for the purpose of receiving taxes. 

Personal property taxes become due and payable on and after 
the delivery of the tax lists to the treasurer, and if not paid before 
March i, they become delinquent and a penalty of 10 per cent is 
added. 

Taxes on real estate also become due and payable on delivery of 
the tax lists to the county treasurer, and if not paid before June i, a 
penalty of 10 per cent is added; and if such taxes remain unpaid 
until January i , following, an additional penalty of 5 per cent is added. 

The law, however, permits the payment of real estate taxes in 
two installments — one-half prior to June i, and the remaining one- 
half any time prior to November i provided that the taxes charged 
against any tract or lot of land exceed one dollar. 

Upon payment of any tax, the treasurer is required to issue his 
receipt therefor, showing the name of the person, the amount and 
date of payment, and the land, lot, or other property on which the 
tax was levied, and the year or years for which such levy was made. 

Personal property taxes are assessed against the person and not 
against the property, while real estate taxes are assessed against 
the property and not against the person. If personal property taxes 
become delinquent collection is enforced against the person assessed 
by distress and sale of any personal property he may own, while the 
collection of delinquent real estate taxes is enforced by the sale of the 
property assessed. 



86o MATERIALS FOR ELEMENTARY ECONOMICS 

249- THE GENERAL PROPERTY TAX^ 

Most of our states have at various times made spasmodic efforts 
to enforce the general property tax. In no other state has there 
been a more continuous and comprehensive effort to secure the 
return for taxation of all personal property than in Ohio. 

The constitution of Ohio adopted in 1851 required the taxation 
of all real and personal property by a uniform rule, at its true value 
in money. The system devised for the enforcement of this provision 
was thus described by the Special Tax Commission appointed in 1893 : 

"We have in Ohio the most efficient and minute scheme of bringing 
upon the duplicate [i.e., assessment roll] all of these classes of property, 
which has been devised in any state. Every citizen is bound under oath 
to make a complete return of his property. The list which he returns is 
to embrace all forms of personal property; if he declines to make the oath 
required by law, a penalty of 50 per cent is added. The statutes also 
provide a method by which the auditor may bring before him the citizen 
and examine him, if he suspect that the return is not a complete one. In 
addition to all this, the county commissioners have authority to make a 
contract with such persons as may give information which will result in 
personal property being placed upon the duplicate. These persons are 
rewarded with a large proportion of the amount recovered through their 
efforts. (In the counties containing the cities of Cincinnati and Cleveland, 
25 per cent; in other counties, 20 per cent)." 

Bearing in mind these extremely stringent provisions of the law, 
it remains to determine how far they have proved effective. It is 
needless to quote in detail from the pages of figures presented by the 
Commission to show the utter failure of these measures to reach the 
personal property of the state. A few citations should suflfice: 

"In 1866 the valuation of the city of Cincinnati was: realty, $66,454,- 
602; personalty, $67,218,101 ; the personal property was greater than the 
amount of real estate by $800,000." 

"In 1892, twenty-five years later, the real estate of Cincinnati had 
increased to $144,208,810, while the personal property had decreased to 
•$44,735,670." 

"The amount of money returned for taxation in the state in 1866 was 
nearly $3,000,000 more than it is to-day (1893)." 

' Adapted from the report of a committee of the International Tax Associa- 
tion on "The Causes of the Failure of the General Property Tax," in Stale and 
Local Taxation, Addresses and Proceedings of the Fourth International Conference 
(1910), pp. 301-4. International Tax Association, 191 1. 



PUBLIC FINANCE AND TAXATION 86 1 

"In 1866 the amount of money returned for taxation in Hamilton 
county (containing Cincinnati) was nearly five times what it was in 1892; 
the amount of credits was nearly double what it is today. The amount 
of bonds and stocks was $200,000 more than it was in 1892." 

These were the fiscal results. The social results are thus sum- 
marized by the Commission : 

"The system as it is actually administered results in debauching the 
moral sense. It is a school of perjury. It sends large amounts of property 
into hiding. It drives capital in large quantities from the state. Worst 
of all, it imposes unjust burdens upon various classes in the community. . . . 
This inequality of taxes weighs most heavily upon those whose thrift and 
prudence have resulted in affording to themselves or their children a com- 
petence. It is evidence that this burden rests with peculiar force upon 
those persons whose scrupulous honesty induces them to make full and 
complete returns of all their property." 

Notwithstanding this severe condemnation of the system and 
the exhibition of its failure, practically no legislative relief was 
secured. The same conditions continued. In 1906 another Com- 
mission was appointed. About that time the Supreme Court declared 
the "tax inquisitor" law unconstitutional, but this had no effect 
on the administration of the law in the period covered by the investi- 
gation. 

The report of this Commission, submitted in 1908, shows the 
same failure in administration as the report of the Commission of 
1893. The fiscal results can be dismissed briefly: 

"The value of all credits returned was $34,000,000 less in 1906 than 
it was in 1890, and $16,000,000 less than it was in 1870. The value of all 
stocks and bonds was $2,575,000 less in 1906 than it was in 1880, and the 
value of all intangible property, including moneys, credits, stocks and bonds, 
as returned for taxation, was nearly $8,000,000 less in 1906 than it was in 
1890." 

Similar examples are given in regard to other classes of personal 
property. To quote the totals, or the ratio of personal property 
to real, would be misleading, because under the Ohio law all of the 
property of railroads, and of some other corporations, including 
their real estate, is returned as personal property. For this reason 
the assertion sometimes made that the listing system of Ohio must 
be successful because the reports show that personal property amounts 
to some 30 per cent of the total assessment, is based upon a mis- 
understanding. 



862 MATERIALS FOR ELEMENTARY ECONOMICS 

This Ohio report of 1908 continues: 

"The widespread concealment of intangible property, increasing in 
amount year by year, is the most convincing proof of the failure of the 
general property tax. It shows that after more than fifty years of expe- 
rience, with all conceivable methods in the way of inquisitor la\vs, severe 
penalties, and criminal statutes, designed to force the owners of moneys 
and credits, stocks and bonds, to put their holdings upon the tax duplicate, 
not only is the percentage of such property less than ever before, but 
public sentiment seems to be more and more openly approving an evasion 
of the law. Such a condition of affairs is so manifestly wrong and so 
inimical to good government that its longer continuance is a grave injury 
to the state." 

It is significant that this Commission, whose members had first- 
hand knowledge of the conditions resulting from stringent attempts 
to enforce the general property tax, do not advise a stricter adminis- 
tration, or even a continuance of the existing system. Instead, they 
make the following recommendations : 

"No just or satisfactory system can be established in this state with- 
out removing the constitutional obstacles that now bar the way. The 

general property tax has long ago served its day The reports of 

State Tax Commissions within the last ten years disclose no instance in 
which the general property tax has been approved and few in which it has 

not been expressly condemned We recommend an amendment to 

the constitution of Ohio abolishing the general property tax now required, 
and giving the legislature a freer hand to deal with such subjects as fran- 
chises, stocks, bonds, cash, mortgages, and other intangible property." 

Your Committee has quoted at this length from the Ohio reports 
because that state is recognized to have made as earnest and thorough 
efforts to enforce the tax by severe administration as any of the 
states. The statistics from other states that have listing systems 
show practically the same results. 

250. THE TAXATION OF INTANGIBLE PERSONALTY 

I. THE MINNESOTA PLAN^ 

It is generally conceded that the value of money and credits 
owned in the state far exceeds the value of tangible personal property, 
yet prior to 191 1 the assessed value of such property never in any year 

' Adapted from the Third Biennial Report of the Minnesota Tax Commission 
(1912), pp. 4.6-57. 



PUBLIC FINANCE AND TAXATION 863 

exceeded 29 per cent of the total personal property assessment of me 
state. 1 

In 1880 money and credits represented 22.6 per cent of oun 
total personal property assessment. In 1890 it had increased to 
27.8 per cent of the total, but in the next ten years, notwithstanding 
the rapid growth of the state in wealth and population, the trend was 
downward, until, in 1900, it represented but 22 . 5 per cent of the total. 
During the next decade it began to show some increase, noticeably 
so after the organization of the tax commission in 1907, and in 1910 
it reached the highwater mark under the old system, the amount 
that year being 29 per cent of the total. Realizing our failure under 
the old system, after more than half a century of unsuccessful effort 
to get certain forms of intangible personal property on the tax rolls, 
the legislature in 191 1 enacted a law providing for the separate listing 
of money and certain classes of credits, and imposing a fiat tax rate 
of three mills on the dollar in lieu of all other taxes. In 1911, the 
first year of the three mill tax rate, the assessed value of money and 
credits jumped to 48 . 5 per cent of the total, while this year it is 
50.8 per cent of the total personal property assessment of the 
state. 

In 1 910 the assessed value of money and credits in the classes 
now included in the three mill tax law amounted to $13,919,806. 
In 191 1, the first year under the new law, the amount returned for 
taxation was $115,481,807, an increase of 730 per cent over the pre- 
ceding year. The total assessment of money and credits this year 
amounts to $135,369,314, being an increase of $19,887,507, or 17.2 
per cent over 191 1, and 873 per cent over 1910. Based on the popu- 
lation of 1 910, the per capita assessment of this class of property 
was $6.70 in 1910, $55.63 in 1911, and $65.22 in 1912. Compared 
with bank deposits, the assessment of 1910 represented only 4.2 
per cent of such deposits, while in 1911, it equaled ^,3 -8 per cent, and 
in 191 2, 42.4 per cent of bank deposits. 

That the assessment is much more widely, and hence much more 
equitably distributed among the people is shown by the large increase 
in the number of people assessed under the new law. While no 
exact data is available for 1910, it is estimated that the number of 
people assessed for this class of property in that year did not exceed 
6,200. In 191 1 the number assessed was 41,439, and in 191 2, the 
present year, 50,564 assessments of such property have been reported, 
a gain of 9,125, or 22 per cent over the preceding year. 



864 MATERIALS FOR ELEMENTARY ECONOMICS 

While it is not claimed that all intangible property subject to 
taxation under the new law has been placed on the assessment rolls, 
the proportion that now escapes taxation is much less than it was 
when we attempted to tax such property with the same machinery 
and on the same basis as other forms of property. In addition, it 
will not be denied that the tax burden on this class of property is 
much more widely, as well as much more equitably and justly, 
distributed than it was under the old system. 

While it can scarcely be claimed that two years afford sufficient 
time to demonstrate the success or failure of any radical departure 
from methods of taxation that have grown hoary with age, yet 
our brief experience in Minnesota with the three mill tax on money 
and credits justifies us in the belief that we have taken a decided 
step in advance. Men differ as to the wisdom of taxing property 
of this nature at all, but there is no difference in opinion that a burden- 
some or confiscatory tax drives such property into concealment. 
Experience in our own and every other state has demonstrated that 
when a tax rate consumes more than lo per cent of the income from 
this class of property it will not be voluntarily listed for taxation. The 
average tax rate in Minnesota this year is nearly 30 mills. With 
such a rate consuming, as it would, from 40 to 60 per cent of the income 
from invested credits, it would be folly to hope to reach more than 
a fraction of such property for purposes of taxation under the old 
system. 

It was for this reason that the legislature passed the three mill 
tax law. We believe it is a decided improvement over the old method 
of taxing money and credits, because it is more equitable and will 
eventually produce more revenue than the old system did. Above 
all, it makes for good citizenship, because it reduces the premium 
on dishonesty, and permits men to be truthful in their tax statements, 
without the fear of having their property confiscated in excessive 
tax rates. 

II. THE RESULTS IN PENNSYLVANIA, CONNECTICUT, AND MARYLAND' 

The effect of reducing the rate on intangible personalty and 
providing improved administrative machinery in Pennsylvania is 
shown in an increase in assessments from $155,107,000 in 1885 to 
$390,750,000 in 1886, or 152 per cent; at the same time revenue 

' Adapted from the Report of the United States Commissioner of Corporations on 
Taxation of Corporations, Part IV (191 2), pp. 14-15. 



PUBLIC -FINANCE AND TAXATION 865 

increased from $610,608 to $1,172,250, or 92 per cent. The average 
increase for the five years following (1887-1891) was 57 per cent in 
both assessments and receipts. In 1892 the rate was changed from 
$3 to $^ During the five years following (1892-1896) the average 
assessment increased to $839,565,000, or 37 per cent, and revenue 
increased to $3,358,260, or 82 per cent. In 1910 assessments 
amounted to $1,741,865,000 and revenue to $6,967,460, an increase 
in each case of 107 per cent over the yearly average for the 1892-1896 
period. 

The Connecticut plan gives the option of paying locally the gen- 
eral-property tax at the regular rates. Amounts assessed and paid 
locally are shown separately from those assessed and paid to the state 
at the uniform rate. The percentage of increase is, however, based on 
the total of both. The low uniform rate was adopted by the state of 
Connecticut in 1890. For the following seven-year period (1890- 
1897) the average yearly assessments increased over the assessments 
for 1889 from $12,982,000 to $27,836,000, or 114 per cent, while 
revenue decreased from $162,288 to $133,107, or 18 per cent. During 
1898 the uniform rate was raised to $4. This resulted in decreasing 
assessments 14 per cent and decreasing revenue 2 per cent. This 
decrease, however, was overcome, and in 1910 assessments amounted 
to more than $45,000,000, an increase over 1898 of 89 per cent, and 
revenue to approximately $230,000, or an increase of 76 per cent during 
this period. 

Figures for the entire state of Maryland are not available, and 
those [which are here given] are for the city of Baltimore only. The 
effect of the inauguration of the low rate in 1897 was to increase 
assessments from $6,000,000 to $58,704,000, or 878 per cent, and 
revenue from $130,650 to $280,312, or 115 per cent over the previous 
year. Between 1897 and 191 1 assessments increased to $165,834,000, 
or 182 per cent, and revenue increased to $862,337, or 208 per cent. 

251. TAXATION OF CORPORATIONS' 

I. SOME OF THE ISSUES IN THE TAXATION OF CORPORATIONS 

(i) Should taxation be intentionally so framed as to lay especial 
burdens upon corporations ? On the one hand, it can be contended 

' Adapted from the Report of the Commissioner of Corporations on Taxation of 
Corporations, Part II (19 10), pp. 9-10, 2. In Part IV of the report the following 
classes of taxes are mentioned : 



866 MATERIALS FOR ELEMENTARY ECONOMICS 

that corporations are merely artificial creatures of the states and 
that they should pay well for the exceptional privileges enjoyed 
by them; on the other hand, it can be contended that corporations 
are essential to business as at present conducted, and that, by reason 
of the comparative ease with which their investments and operations 
can be ascertained, they actually bear a heavier burden of taxation 
even when no theoretical discrimination is made against them. 

(2) Should shareholders and bondholders pay taxes in addi- 
tion to the taxes paid by the corporation on the corporate property ? 
On the one hand, it can be contended that the corporation is an 
artificial entity distinct from the persons interested in it; on the 
other hand, it can be contended that the corporation and the persons 
interested in it are identical in fact, and that to tax the corporation 
and those persons simultaneously is to burden the same persons 
twice. 

(3) Is it inequitable to tax either a corporation or its stock- 
holders on the basis of the market value of the stock ? On the one 
hand, it can be contended that thus the tax is based both upon 
property and upon expectation, and that in the case of natural 
persons expectation is never taxed; on the other hand, it can be 
contended that corporate organization facilitates the capitaliza- 
tion and present realization, in a sense, of merely expected profits, 
and that in recognition of the advantage thus conferred by the 
state it is only fair to exact a special burden. 

(4) Should a state permit outside corporations to do business 
within its borders upon terms more favorable than those exacted 
from the corporations of the state itself? On the one hand, it 



1. General property tax 
(a) on all property 

{b) on property used in the business 

(c) on property not used in the business 

(d) on property and also on franchise value 

2. Special franchise tax (franchise valued as property) 

3. Capital stock tax 

4. Gross earnings and gross receipts taxes 

5. Mileage tax 

6. Corporate-excess tax 

7. Tax on corporate loans 

8. Lump sum tax 

9. State business-license tax 
10. Income tax 



PUBLIC FINANCE AND TAXATION 867 

can be contended that comity requires the free admission of cor- 
porations from other states; on the other hand, it can be contended 
that a corporation is in legal theory existent only within the boundaries 
of the sovereignty creating it, and that at any rate it is inexpedient 
and unfair to admit corporations upon any other basis than the 
bearing of at least as heavy burdens as are imposed upon those 
chartered by the State itself. 

(5) Should the states differ from one another in their systems 
of corporate taxation? On the one hand, it can be contended that 
the circumstances of the several states vary; on the other hand, 
it can be contended that the experiments now made in the several 
states may be expected to show which system of corporate taxa- 
tion is the best, and that at any rate uniformity is desirable in order 
to prevent capital from being excessively concentrated in a few states. 

II. SOME RESULTS OF THE TAXATION OF CORPORATIONS 

The general results of the study of corporate taxation in New 
England and the Middle Atlantic states are these : 

(i) Each state has a system of its own, and as yet there is no 
marked tendency toward uniformity. 

(2) No state at present treats all corporations in exactly the 
same way, and as between the several sorts of corporations the 
tendency still seems to be toward further differentiation. 

(3) In most of the states changes are so frequent as to indicate 
that as yet a satisfactory and ultimate method has not been dis- 
covered. 

(4) The income from corporate taxation is almost invariably 
increasing, partly because of increase in the number and size of 
corporations and partly because of changes in methods of taxation. 

(5) There is a tendency toward separating sources of local revenue 
from sources of state revenue, and the taxation of corporations tends 
to become a source of state revenue only, with the exception that 
corporation lands, other than rights of way, are still usually taxed 
like the lands of individuals. 

(6) The taxation of corporations is chiefly administered by state 
officials. 



8 MATERIALS FOR ELEMENTARY ECONOMICS 

Percentage of State Taxes (as Distinguished from Local Taxes) 
Contributed by Certain Sources of Taxation for 1910' 



States 



Corporation 
tax 



General 

property 

tax 



Inheri- 
tance 
tax 



Liquor 
tax 



Miscella- 
neous tax 
receipts 



Total 
state 
taxes 



NEW ENGLAND GROUP 

Maine 

New Hampshire 

Vermont 

Massachusetts 

Rhode Island 

Connecticut 

MIDDLE ATLANTIC GROUP 

New York 

New Jersey 

Pennsylvania 

Delaware 

Maryland 

District of Columbia 

EASTERN CENTRAL GROUP 

Ohio 

Indiana 

Illinois 

Michigan 

Wisconsin 

WESTERN CENTRAL GROUP 

Minnesota 

North Dakota 

South Dakota 

Iowa 

Nebraska 

Kansas 

Missouri 



54 
39 
82 

41 
46 

71 

29 
91 
71 
67 

33 
16* 

54* 
19* 

34* 

45 

71 

66 

24* 

18* 

26* 

25* 

31* 

20* 



34 
47 



41 
41 
9 



6 

9 

8 
12 

9 

23 
8 

7 



27 
7 



34 
74 

25 
81 

58 
52 
22 

27 
76 
81 
62 
74 
69 

43 



30 



5 
II 



32 

13 

2 



100 
100 
100 
100 
100 
100 

100 
100 
100 
100 
100 
100 

100 
100 
100 
100 
100 

100 
100 
100 
100 
100 
100 
100 



* Includes state's share of general property tax collected locally from certain corporations . 
(See table of financial results under each state.) With the exception of the District of Columbia, 
as previously noted, it is impossible, practically, to ascertain or estimate from the information avail- 
able the amount thus received from corporations in the states included in this table. 



' From the Report of the Commissioner of Corporations on Taxation of Corpora- 
tions, Part IV (191 2), p. 5. 



PUBLIC FINANCE AND TAXATION 



869 



Percentage of State Taxes (as Distinguished from Local Taxes) Con- 
tributed BY Certain Classes of Corporations for 19 10' 



States 



c a 



w8 



j2 n 



a o 



E8 



^■3 






NEW ENGLAND GROUP 

Maine 

New Hampshire 

Vermont 

Massachusetts 

Rhode Island 

Connecticut 

MIDDLE ATLANTIC GROUP 

New York 

New Jersey 

Pennsylvania t 

Delaware 

Maryland 

District of Columbia .... 

EASTERN CENTRAL GROUP 

Ohio 

Indiana 

Illinois 

Michigan 

Wisconsin 

WESTERN CENTRAL GROUP 

Minnesota 

North Dakota 

South Dakota 

Iowa 

Nebraska 

Kansas 

Missouri 



SS 
41 
34 
46 
37 

38 
SI 
66 
82 
78 

83 
54 
44 
29 
46 
50 
26 



33 
16 



49 
39 



30 
13 



100 
100 
100 
100 
too 
100 

100 
100 
100 
100 
100 
100 

100 
100 
100 
100 
100 

100 
100 
100 
100 
100 
100 
100 



t The Pennsylvania figures in this table are taken from State Auditor's Report, igio. 



' From the Report of the Commissioner of Corporations on Taxation of Corpora- 
tions, Part IV (191 2), pp. 7-8. 



870 MATERIALS FOR ELEMENTARY ECONOMICS 

252. THE INHERITANCE TAX' 

To Americans of the last generation the inheritance tax was a 
fiscal curiosity. It had been adopted by Pennsylvania in 1826, 
and subsequently had found its way into a few other states. But 
most of these early experiments came to untimely ends, and a ''legacy 
tax" enacted by the national government in 1862 met with a similar 
fate when internal taxation was reduced after the Civil War. Prior 
to 1885 the net results of all efforts to domesticate this tax in the 
United States had been that two states, Pennsylvania and Maryland, 
were then levying light duties upon collateral inheritances. In that 
year, however. New York established a tax upon collateral inherit- 
ances, which, in 1891, was extended to direct inheritances of personal 
property; and her example was soon followed by other states. In 
1894 Pennsylvania and Maryland had collected $663,000 from 
inheritance taxes; in 1892 six states collected $3,107,000. Ten 
years later twenty-eight states drew $7,138,000 of revenue from this 
source, and in 1905 thirty states received approximately $10,600,000. 
At the present moment the inheritance tax is found in not less than 
thirty-four states, and in nineteen of these it applies to direct inherit- 
ance as well as to collateral. Manifestly the taxation of inheritance 
is no longer a debatable issue, but must be accepted as an accomplished 
fact of American finance. 

In considering the proper function of the inheritance tax we are 
brought directly to the question whether it should be employed 
solely for the purpose of raising revenue, or should be used as a means 
of regulating the distribution of wealth. In the laws now on the 
statute books of the several states the controlling purpose is, clearly, 
to raise revenue. Upon direct inheritance the rates range usually 
from I to 3 per cent, and in no case exceed 5 per cent; while upon 
collateral they seldom rise above 6 per cent. These figures are not 
higher than can be justified on purely financial grounds; in fact, in 
many states the rates are less than the experience of other countries 
shows that the legislature might well impose. They yield consider- 
able revenue which can be collected with reasonable certainty, slight 
expense and comparatively little hardship to taxpayers. Upon 
estates of the largest size passing to distant heirs or strangers in 

' Adapted from C. J. Bullock, "The Position of the Inheritance Tax in Ameri- 
can Ta.xa.tion," in Stale and Local Taxation, Addresses and Proceedings of the First 
National Conference of the National Tax Association (1907), pp. 231-40. The 
Macmillan Co., 1908. 



PUBLIC FINANCE AND TAXATION 871 

blood, the tax sometimes rises to 15 or 20 per cent; but occasion 
seldom offers for the application of such high rates, and even then 
the limits set by sound principles of finance are not overstepped. 
A tax of 20 per cent upon property in excess of $500,000 passing to 
unknown relatives or strangers in blood, may appear startling at 
first thought, yet it may be defensible from the purely fiscal point 
of view, and will exert little influence upon the distribution of wealth 
in the United States. Upon most inheritances, collateral as well as 
direct, we are now levying from i to 5 per cent. On the theory that 
the purpose of the laws is to raise revenue these rates can be readily 
understood; they are altogether ridiculous, if we assume that the 
purpose is to modify perceptibly the distribution of wealth. 

If swollen fortunes are to be reduced to reasonable size by inherit- 
ance taxation, the rate imposed upon all successions, direct even 
more than collateral, must be raised to a very high figure. From 
2 or 3 per cent the tax levied upon large estates must advance to 
10, 20, or 30 per cent, and perhaps more, before it can have the 
desired effect; and it must apply to property passing from husband 
to wife, father to child, or brother to sister. Now it is not to be 
supposed that all the states will be convinced simultaneously that 
such radical action is necessary; and if some refuse to follow the 
lead of the others, it is easy to see that there will ensue, and that 
speedily, a fearful congestion of swollen fortunes in a few unpro- 
gressive but prosperous states. He who doubts this prediction has 
only to inquire in what states the corporations are now chartered 
from which the "undesirable" fortunes have been mainly drawn. 
Of a certainty, then, the work is too large for the several states, and 
calls for the interposition of the national government. 

What now shall be said of the main proposal ? Is it desirable 
to employ the inheritance tax as an instrument for reducing swollen 
fortunes ? I am constrained to believe that the inheritance tax is 
not the instrument to employ. For, in the first place, a retributive 
inheritance tax could only remedy some of the ill effects of undue 
concentration of wealth, and would in no way remove the causes. 
In social therapeutics, as in medical, it is sound policy to aim at 
causes rather than effects; and this case is no exception to the rule. 

.... If for a single generation we punish commercial crime, 
extirpate social brigandage, and abolish privilege resting upon unwise 
legislation, we shall probably find that the question of the distribution 
of wealth will have settled itself. 



872 MATERIALS FOR ELEMENTARY ECONOMICS 

A second objection to the proposed employment of the inheritance 
tax is that it would punish the just man with the unjust, and would 
check legitimate ambition and business enterprises. For your tax 
law must be impersonal, and cannot be so drawn that it will apply 
to "tainted" fortunes only. You must enact that all fortunes in 
excess of a stated sum shall be liable to a tax of 10, 20, 50 per cent; 
and thus you punish the innocent as well as the guilty. You might, 
indeed, proceed upon the principle that no man can honestly acquire 
more than one, or five, or ten million dollars ; that theory is sometimes 
propounded by persons who desire to regulate the distribution of 
wealth. But in that case you would be bound logically to levy a 
tax of 100 per cent upon all sums which wealthy malefactors accumu- 
late in excess of the stated amount; otherwise you would refuse to 
recover for the use of all the people some portion of the property of 
which they had been despoiled, and would virtually connive at the 
transfer of stolen goods. If this theory proves more than is usually 
anticipated or intended, one, and only one, other may be adopted. 
We may proceed upon the theory that although a man may acquire 
honestly more than one, or ten, or twenty million dollars, it is unde- 
sirable that he should be permitted to transmit such a sum to his 
heirs. Not unnaturally, this idea appeals strongly to those who 
believe that no small part of such swollen fortunes is likely to have 
been gained by methods which, if within the letter of the law, were 
contrary to sound morals and sound public policy. Without doubt 
it is upon such considerations that most advocates of confiscatory 
inheritance taxes would rest their case. 

But even in this form the proposal is open to the objection that 
it contemplates the establishment of a hard and fast rule which must 
be the same for fortunes honestly acquired and for those gained 
through craft, deceit or oppression. 

A third objection is that taxation, even the taxation of inheritance, 
is usually a clumsy agency for social reform, and ordinarily accom- 
plishes either more or less than is desired. Our present moderate 
taxes of from i to 3 per cent upon direct inheritances are collected 
with considerable success, since it is found that the average man 
will not exert himself to escape them. He accepts them as a not 
unreasonable method of collecting revenue, and does not look upon 
the probate court as an agency for confiscating his fortune. But 
no experience of what wealthy men do under our present laws can 
justify us in concluding that they will not make every possible effort 



PUBLIC FINANCE AND TAXATION 873 

to escape a tax of 20 or 30 per cent, and no one knows how much 
more. For any state to collect such a tax would be substantially 
an impossibility, except in the case of landed property. A federal 
tax would not be so easy to escape, but it is certain that various 
methods of evasion could and would be devised. 

For under modern conditions capital knows no national bound- 
aries, and when facing a confiscatory tax is generally free to migrate. 
Many capitalists, too, and those the largest, whom the social reformer 
desires most to reach, would choose expatriation rather than surrender, 
even at death, one-third or one-half of their fortune. Transfers of 
property long before death would become exceedingly common, and 
these could be controlled only by a universal system of taxes on 
transfers, than which nothing could be a greater impediment to 

legitimate business Can we doubt that a confiscatory federal 

tax would be subject to wholesale evasion, and that the very persons 
the reformer desires to reach would be best able to profit thereby ? 

The constitutional aspects of an attempt to reduce large fortunes 
I am compelled to pass without remarks. If they have ever been 
considered by advocates of the plan, they have evidently been dis- 
missed without serious study, perhaps as trifles about which the law 
does not care. I am unable, also, to consider the question whether, 
if the rights of inheritance and bequest are to be restricted, we would 
not better proceed by modifying the general laws relating to the 
subject, rather than educate men in the belief that they possess 
comparative freedom of testamentary bequest, and then undertake 
by taxation to prevent them from exercising that right. I venture, 
however, to express the opinion that, if this step is ever to be taken, 
the simpler, surer, yes, the honester, plan is to modify the laws of 
inheritance and bequest. Unless we are ready to do that, let us 
use the inheritance tax merely for the purpose of collecting a reason- 
able revenue from property passing in accordance with law. 

It remains to consider the position of the inheritance tax in 
our American system of taxation. Should it be a state tax or a 
federal tax? Should it, possibly, be levied by both federal and 
state governments ? 

From the very beginning the federal government has ordinarily 
contrived to defray its expenses by indirect taxes, and it has today 
no occasion to appropriate any branches of taxation employed by the 
several states. True, national expenditures have increased in recent 
years, and are still rising. True, also, increased revenues may be 



874 MATERIALS FOR ELEMENTARY ECONOMICS 

needed before long. But even when that time comes there will be 
no need of taxing inheritances. By raising the taxes on beer and 
tobacco to the rates enforced during the Spanish War, and by reintro- 
ducing a moderate duty upon tea, not less than one hundred millions 
of additional revenue can be had without injury to business or serious 
burden to taxpayers. In this country, unlike Germany, only the 
state and local governments are seriously vexed with problems of 
revenue. From some branches of taxation they are debarred by 
constitutional restraints; from others, by economic; while their 
expenditures far exceed the total federal outlay, and bid fair to 
increase still more rapidly. Their taxes fall heavily upon property 
and business, and are usually so high that it is unwise, even if possible, 
to increase them. All the revenue that can properly be raised by the 
taxation of inheritances is sorely needed by the several states, and 
of right should be left to them. For the federal government to enter 
this field would be worse than a blunder, it would be a fiscal crime. 

For financial reasons, therefore, I hold that the inheritance tax 
should be reserved for the several states. For economic and social 
reasons, I maintain, its function should be to raise revenue, and not 
to reshape the distribution of wealth. Upon both financial and 
economic grounds, I contend, we should not employ the tax in hazard- 
ous schemes for the regulation of fortunes. 

253. THE INCOME TAX IN WISCONSIN^ 

A brief review of the principal provisions of the law may be 
of interest. The term "income" is made to cover all rent of real 
estate, wages, salaries, dividends, business profits, interest upon 
investments, royalties, and all income derived from any source not 
exempted by law. 

The law applies to all residents of the state, and to non-residents 
upon such income as is derived from sources within the state or within 
its jurisdiction. It also covers corporations, joint stock companies 
or associations organized for profit, and copartnerships. 

The income of a resident derived from business partly within and 
partly without the state is taxed only upon that part of the income 
derived from the business within the state. Income, however, that 
is derived from rentals, stocks, bonds, securities, or evidences of indebt- 

' Adapted from the Third Biennial Report of the Minnesota Tax Commission 
(191 2), pp. 154-64. 



PUBLIC FINANCE AND TAXATION 875 

edness is' taxed on the full amount under the rule that intangible 
property follows the residence of the owner for purposes of taxation. 

The family is taxed as a unit, the income of the wife and chil- 
dren under eighteen years of age being added to that of the husband 
when they are not living separately from husband or parents. 

Fairly liberal exemptions are allowed individuals. If single, 
income up to and including $800 is exempt; in the case of husband 
and wife, $1,200 is exempt, and for each child under the age of eighteen 
years an additional exemption of $200 is allowed. 

Individuals are also allowed certain deductions, such as ordinary 
and necessary expenses actually paid within the year in carrying 
on the profession, occupation or business from which the income is 
derived, including a reasonable allowance for depreciation of the 
property from which the income is derived, losses during the year not 
com,pensated for by insurance or otherwise, dividends or income 
received from investments otherwise taxed under the income tax 
law, interest paid on indebtedness, interest received from exempt 
securities, salaries and pensions received from the United States 
government. Inheritances upon which the inheritance tax has been 
paid, and insurance to the amount of $10,000 received by legal depend- 
ents of the decedent, can also be deducted from income. 

No exemptions are allowed corporations, joint stock companies or 
associations, but certain deductions, similar to those allowed indi- 
viduals, are permitted. In addition, salaries of officers and employees 
may also be deducted, provided that the name, address, and amount 
paid each officer or employee to whom a compensation of $700 or 
more was paid during the year is reported. 

Deductions can also be made for taxes paid in other states upon 
the source from which the income taxed under the law is derived. 

The tax rate is progressive, bearing more lightly upon those 
with small incomes and more heavily on those with larger ones. 
It begins with i per cent on the first $1,000 of taxable income and 
increases to ij per cent on the second $1,000, i^ per cent on the third 
$1,000, if per cent on the fourth $1,000, 2 per cent on the fifth $1,000, 
and one-half per cent more upon each additional $1,000 up to 5I 
per cent on the twelfth $1,000. On the excess above $12,000 the 
rate remains stationary at 6 per cent. 

The rates are cumulative. For example, a taxable income of 
$1,000 would pay $10; if the income amounted to $2,000 the tax 
would be $22.50, on $3,000 it would be $37.50, on $4,000, $55, and 



876 MATERIALS FOR ELEMENTARY ECONOMICS 

upon $5,000 it would amount to $75. If an individual has paid 
personal property taxes he is allowed an offset for the full amount 
paid upon production of this tax receipt if such taxes were upon 
the property or business from which the income is derived. 

The table of rates for corporations, joint stock companies, and 
associations is based on a somewhat novel principle and differs 
materially from that of individuals. An attempt is made to adjust 
such rates on the earning power of the corporation. The earning 
power in turn is based on the relation of the taxable income to the 
assessed value of the property used in producing the income. The 
theory of the corporation rate is that the larger the investment in 
proportion to the profits earned, the lower the rate should be. Fol- 
lowing this theory, the law provides that if the taxable income equals 
I per cent or less of the assessed value of the property, the rate shall 
be one-half of i per cent upon the income. If the taxable income is 
more than i per cent but does not exceed 2 per cent, the rate shall 
be I per cent. If more than two per cent and less than 3 per cent, the 
rate is fixed at i| per cent, and so on by steps of i per cent for the 
proportion, and one-half of i per cent for the rate, until 6 per cent is 
reached upon profits amounting to 12 per cent. The rate on profits 
amounting to more than 1 2 per cent remains uniform at 6 per cent. 

Professor Delos O. Kinsman, a noted writer on income taxation, 
who assisted in framing the bill, thus justifies the method of determin- 
ing corporation rates above outlined: 

It is believed that the above method by which the rate of tax upon 
the income of corporations is fixed is a distinct step in the direction of 
greater justice. It has been the common practice among countries levying 
the income tax to group the income of corporations with the income of 
individuals and base the rate of tax upon the amount of income received. 
The income tax— in theory most just — is by such a method of application, 
made most unjust. For instance, whether under a proportional or a pro- 
gressive rate, let us assume that a twenty thousand dollar income is taxed 
6 per cent. In levying the tax by this lump sum method no consideration 
whatever is given the amount of the capital invested. 

If in business "A" $20,000 is invested to secure the $20,000, the rate 
of return equals 100 per cent. 

If in business "B" $100,000 is invested to secure the $20,000, the rate 
of return equals 20 per cent. 

If in business "C" $2,000,000 is invested to secure $20,000, the rate 
of return equals i per cent. 



PUBLIC FINANCE AND TAXATION 877 

Yet by the common method of fixing the rate by the amount of the 
income received the above named businesses are assumed to possess equal 
tax paying ability and each made subject to the same 6 per cent tax, although 
"A" yields 100 per cent on the amount invested; "B " yields 20 per cent 
on the amount invested; and " C " yields i per cent on the amount invested. 
This is clearly unjust. A business yielding 100 per cent dividends is 
manifestly far better able to pay a 6 per cent income tax than a business 
yielding a dividend of i percent. 

By basing the tax rate, as is done in this section, on the rate made on 
the assessed value of the property, the small concern yielding a low rate 
on the investment will be taxed lightly, and the rate will increase only 
with the rate returned on the investment. 

The most striking feature of the administrative scheme is the 
degree to which the work is centralized in the tax commission. While 
other states that have experimented with income taxation have usually 
entrusted its enforcement to local authorities, Wisconsin has reversed 
the rule and is trying centralized authority. As the tax commission 
of that state is clothed with greater powers and more ample facilities 
for the enforcement of tax laws than perhaps any other tax commis- 
sion in the United States, it may be asserted with a considerable 
degree of confidence that if the income tax law proves a failure in 
Wisconsin it will be due to either defects in the law itself or to the 
inherent weakness in the principle underlying the law when applied 
to state conditions, and not to lax or inefficient administration. 

The district assessors assess the income of individuals and the 
tax commi^ion the income of corporations, joint stock companies, 
and associations. The income tax is collected in the same manner 
as personal property taxes. Such taxes are apportioned 10 per cent 
to the state, 20 per cent to the county, and 70 per cent to the town, 
city, or village in which the tax was assessed, levied and collected. 

In point of revenue the income tax law in Wisconsin has in it^ 
first year more than met the expectations of its advocates. The 
income tax assessed this year will exceed $3,300,000. This is quite 
a remarkable showing for the first year, especially when compared 
with results obtained in other states that have experimented with 
similar laws. It even exceeds the amount collected under the first 
federal income tax law in 1863 by more than $550,000, although that 
law applied to the entire country. 

Of the total tax, corporations will contribute about $2,200,000, or 
nearly 66| per cent of the total, and individuals and firms about 



878 MATERIALS FOR ELEMENTARY ECONOMICS 

$1,110,000, or ^T,^ per cent of the total tax/ It is estimated that the 
average rate on corporations will be between 5 and 6 per cent, while 
the rate on individuals and firms will be slightly in excess of 2 per cent. 

The preceding figures represent the total income tax assessed 
from which, of course, a very considerable deduction will be made for 
taxes paid on personal property. No accurate data are yet available 
as to how much this offset will be, but from investigations already 
made it is estimated that the net tax on individuals will be about 
80 per cent, and on corporations about 50 per cent of the total income 
tax assessed. On this basis the income tax will yield net above the 
personalty offset about $1,980,000, of which amount the state will 
receive $198,000, the counties $396,000, and the towns, cities and 
villages $1,387,000. These amounts represent clear gains in public 
revenues resulting from the income tax law. 

The advocates of the income tax have always contended that 
eventually such a tax would enable the state to exempt personal 
property from taxation, except public utilities and banks, without 
impairing the public revenues. This could almost be done the first 
year. The entire tax levied on personal property this year is esti- 
mated to yield about $4,100,000, an amount only about $800,000 
in excess of the income tax. It is not improbable that within the 
next two or three years the personal property tax, with the exceptions 
above indicated, could be entirely abolished without any diminution 
in the public revenues. 

Centralized administration is the strong feature of the Wisconsin 
income tax law and much of its success is undoubtedly due to this 
important provision. It is also strong in many other features not 
heretofore included in the income tax laws of other states. They 
are thus summarized by a member of the Wisconsin state tax com- 
mission f 

In the mind of practically everybody connected with the administra- 
tion of the Wisconsin tax, three more or less novel conclusions have been 
established beyond reasonable doubt. 

First, the American taxpayer is honest and will tell the truth provided 
you take the trouble to ask him direct questions and provided the rate 
of taxation is reasonable and not — as the ordinary property tax rate is on 

' The tax was primarily an urban tax. Over 40 per cent of the tax was assessed 
in Milwaukee alone, and more than 80 per cent in the seventeen counties contain- 
ing cities of the second, third, and fourth classes. 

^ Professor T. S. Adams. 



PUBLIC FINANCE AND TAXATION 879 

securities — confiscatory. The maximum rate under the Wisconsin income 
tax is 6 per cent, whereas the old property tax frequently took from 20 
to 60 per cent of the net income from credits when by some unhappy chance 
the assessor happened to find them 

The second conviction noted above is simply that the idea of collection 
at source has been greatly exaggerated. A very large majority of the 
stockholders of the corporations represented in any state live in that state. 
With respect to these the tax can be collected at the source. Moreover, 
every corporation doing business in a state can be, and in Wisconsin has 
been, asked to report all the stockholders and salaried employees living in 
Wisconsin with the dividends and salaries paid to them, respectively. 
Furthermore, corporation bonds may be defined as an interest in the busi- 
ness and the tax is collected directly from the corporation, the corporation 
being authorized to deduct the tax from the interest when it has not cove- 
nanted to pay the tax itself. This has been done in Wisconsin. The 
remaining forms of income will be taken care of by the honesty of the 
average taxpayer when the rate is reasonable. 

This surprising notion of the honesty of the taxpayers is not mere 
sentimentalism and not mere buncombe. It is completely borne out by 
the facts. The impression of practically everybody connected with the 
administration of the Wisconsin income tax is that more than 90 per cent 
of the net income theoretically taxable under the Wisconsin law has been 
voluntarily returned. Border line questions have in many cases been 
decided in favor of the taxpayer, and there has been considerable uncertainty 
about difficult, doubtful points, but in the large majority of instances 
attention has been voluntarily directed to these points, and almost never 
has any attempt to conceal the facts been encountered when the taxpayer 
was questioned. The assessors did not predict this; they did not expect 
it, but they now know it. 

The third novel conclusion is that a state income has, as contrasted 
with the federal income tax, more natural advantages than disadvantages. 
It may have where properly administered, and does have in Wisconsin, 
ten times the local knowledge because it can have ten times the number 
of assessors by combining the machinery of the general tax system with 
the machinery of the income tax. In literally hundreds of cases the writer 
has discovered that reports under the Wisconsin income tax were more 
carefully made than under the federal corporation excise tax and fewer 
doubtful questions decided in favor of the taxpayer. In Wisconsin tax- 
payer A is used to check the accuracy of taxpayer B. What is outgo to 
B is income to A. B is asked to tell with respect to certain important 
items of outgo the names and addresses of the recipients. There is thus a 
cross-check of which the federal government could probably not avail 
itself. In any event the writer feels certain that the assessment rolls of 
Wisconsin now record a higher percentage of actual taxable income than 



88o MATERIALS FOR ELEMENTARY ECONOMICS 

the federal government has on that part of its records which cover the same 
taxpayers. 

That the Wisconsin income tax law has been a remarkable suc- 
cess for the first year is now generally admitted. Not only has it 
resulted in a large increase in revenue, but it has unquestionably 
distributed the tax burdens more equitably among those able to 
bear them than ever before in the history of the state. Under its 
provisions a considerable amount of the public revenue will come 
from people of large incomes, many of whom have heretofore con- 
tributed but little to the expenses of government. If income fur- 
nishes the proper measure of the taxable capacity of people, the Wis- 
consin income tax law is a long step in the direction of greater justice 
in taxation. 

Nevertheless, while the success of Wisconsin in its first year's 
experience with a state income tax has far exceeded the expectations 
of its advocates, yet it could scarcely be claimed that one year is 
sufficient time in which to fully test out an old principle of taxation 
clothed in new administrative machinery. A more extended experi- 
ence will probably suggest a number of desirable changes in the law 
to make it fit the industrial and social conditions of the state. Its 
ultimate success, however, is full of promise. 

254. SEPARATION OF STATE AND LOCAL REVENUES' 

ADVANTAGES OF SEPARATION 

The advantages to be derived from the separation of state and 
local revenues are declared to be: (i) conformity of tax system to 
natural division of government; (2) greater equality of assessment; 
(3) lower tax rates; (4) the elimination of the conflicts between city 
and country; and (5) a greater flexibility of taxes and larger adapta- 
tion of means to end."" The growth of statewide business has made 
it necessary to materially modify the tax system. The taxation of 
corporations by special acts has tended steadily to separate the sources 
of the state's revenue from those of the local governments. It is 
felt that in addition to securing a natural division of taxing function 
based upon the character of the government, such separation would 
eliminate the efforts now made to keep assessments lower, since the 

' Adapted from the First Biennial Report of the Minnesota Tax Commission 
(1908), pp. 204 ff. 

^ Professor Seligman, in Proceedings of National Tax Conference, 1907, p. 491. 



PUBLIC FINANCE AND TAXATION 88 1 

question would then become a local one. Local tax rates would be 
reduced by the amount of the former state tax and some of the old 
causes of strife between city and country over the assessments no 
longer existing, would do away with that friction, since each com- 
munity would in a large measure determine its own basis of assessment. 
And finally, each community could work out for itself the adjustment 
between assessment, taxes, and expenditures which seemed wise to 
the people of the district. 

OBJECTIONS TO SEPARATION OF STATE AND LOCAL REVENUES 

To these but briefly stated advantages, some objection can be 
and has been made. The original purpose in separating state and 
local revenues was to remove the problem of equahzation as a state 
issue, but with this has gone in the later statements of the plans the 
home rule idea of taxation. The only freedom the local governments 
would have would be in the matter of exemptions, since the state 
would certainly not give a local government the power to make sub- 
stitutes for the personal property tax. One can hardly conceive of a 
more hodgepodge system of taxation than that likely to arise out of 
a system of home rule where each community was permitted to do as 
it pleased. Home rule becomes in its last analysis, where such powers 
of legislation are not granted to the local governments, a synonym 
for the single tax of real estate.^ Here again the question may arise 
as to the equality of assessment as between adjoining local govern- 
ment districts. In one instance the assessment may be high, in the 
other low, yet the owners may be competitors in the same market 
with fundamentally different tax burdens on practically the same kind 
of property. In fact, the argument and the necessities of the situa- 
tion seem to point to centralization of assessment methods and the 
removal of the more objectionable features of the personal property 
tax through the taxation of credits, moneys, stock and bonds at their 
source, namely, as they are found in the possession of corporations. 
This, however, as a system is a long way from one developed upon 
the avowed purpose of separating the state from the local revenues. 

METHODS OF SECURING SEPARATION 

Two methods of securing the separation of state from local 
revenues have been suggested: 

I. The first method proposes the abandonment of the general 
property tax as a means of raising state revenues and the substitution 

' Professor T. S. Adams, in NationaljTax Conference, 1907, p. 518. 



882 MATERIALS FOR ELEMENTARY ECONOMICS 

in its place of special corporation taxes, tax on inheritances, license 
taxes, etc. It is not, however, every state that has sources of revenue 
large enough to make it possible to raise all the revenue needed from 
the tax on corporation and inheritances. The best that can be done 
in states where such is the case is to develop as far as possible the 
special taxes on corporations and inheritances and rely for the balance 
upon the taxation of the general property in the state. 

2. In order to meet the difficulty referred to above, that of 
insufficient sources of revenue to permit of separation of state and 
local revenues, it has been proposed to call upon the local govern- 
ments to contribute to the expenses of the state in proportion to 
their expenditures and by this means secure what was accomplished 
by the special taxation of corporations. 

The objection urged against this plan is the check it places 
upon local expenditures. This would be especially true of new com- 
munities that are struggling to secure better roads, pavements, 
sewers, electric lights, and schools. Such communities would be 
punished for the expenditures made for improvements. While this 
objection in the long run would not hold good it is doubtful if the 
legislatures of any considerable number of states would look with 
favor upon the plan. They would prefer the more direct way of 
taxing corporations. 

An objection to separation as distinct from centralization, which 
can be given at least an early place in the list, is the violation of the 
principle of a budget which ensues when the emphasis is placed upon 
separation of state from local revenues. That principle may be 
formulated in this fashion: no greater sum shall be raised by taxa- 
tion than is necessary to meet the expenses of government. The 
taxation of corporations without regard to the returns likely to be 
received from them may or may not produce sufficient revenue; 
if it produces more than enough the resulting effects on legislative 
action and the attitude of the people are by no means happy. In 
other words, elasticity of revenue is almost an essential of good 
government. In addition to this objection there is also the loss of 
interest by the people in the expenditures of the state when the 
revenues for state purposes are raised entirely from indirect sources. 
It is not to be argued from this statement that the taxes for common- 
wealth purposes shall be raised by direct taxation alone, but it does 
follow that the state will do well not to separate state from local 
revenues to the degree called for by the advocates of the idea, but 



PUBLIC FINANCE AND TAXATION 883 

secure incidental separation without giving over the right to lay a 
direct tax. If you do not have separation of state and local revenues, 
it is said, the problem of equalization is an ever present one. This 
problem, however, is to be met by centralization of assessment, now 
made possible by the creation of permanent tax commissions. As 
said above, the placing of local taxation at the will of the local govern- 
ment cannot result in any great betterment of the situation, but is 
likely to produce confusion, inequality of taxation, and overlapping 
due to the narrow confines of the local governments. 

255. THE TAXES ON LAND IN WESTERN CANADA' 

The more recent trend of sentiment in favor of the taxation of 
land values as the principal source of state and local revenues is 
in the direction of a modified form of the Henry George theory of 
community ownership. That theory does not appeal to the average 
American citizen in whom the desire for ownership is almost as 
deeply rooted as the love of home and family. He cannot or will 
not reconcile himself to the theory that the growth in the value 
of land is a communal interest and should be shared in common by 
all the people. The new school confines its advocacy of the land 
tax to the simple proposition of making land values the basis of 
state and local taxation, exempting improvements and all forms 
of personal property. The Henry George advocates would socialize 
land; the new school would simply use it as the sole basis of state 
and local taxation. 

A brief review of the taxing system of the four western prov- 
inces — Manitoba, Saskatchewan, Alberta, and British Columbia — 
may be of interest. 

TAXATION IN MANITOBA 

The province of Manitoba imposes no provincial tax on real or 
personal property. The public revenues, in addition to the Dominion 
subsidy, are derived principally from provincial lands, liquor licenses, 
railroad, corporation, and inheritance taxes, and other special taxes 
and fees. Municipalities, however, are authorized to impose a tax 
on both real and personal property, subject to certain exemptions. 
The real estate exemptions are similar to our own and include public 
property, and property used for educational, religious, and charitable 

' Adapted from the Third Biennial Report of the Minnesota Tax Commission, 
(1912), pp. 167-74. 



884 MATERIALS FOR ELEMENTARY ECONOMICS 

purposes. Creameries and cheese factories are also exempt. Per- 
sonal property exemptions include household goods and effects, and 
the live stock and farm tools and implements of farmers used and 
kept on the premises of the owner. Cities and villages are authorized 
under certain conditions to impose a business tax in lieu of personal 
property taxes. 

Winnipeg, the principal city of the province, derives its pubUc 
revenue from real estate, business, and franchise taxes. Land for 
purposes of taxation is assessed at full value and buildings and 
improvements at two-thirds of full value. The rate of taxation in 
191 1 was 13.25 mills. 

The business tax was introduced in Winnipeg in 1893 to take 
the place of personal property taxes. Originally the tax was based 
on measurement, that is, on the number of square feet occupied 
by the business. This system was changed in 1906 to a rental basis. 
The tax is now imposed on the rental value of the property occupied 
by the business. The assessed rental value may be more or less 
than the actual rent paid if, in the opinion of the assessment com- 
missioner, the true rental value is more or less than the actual rent 
paid. The present rate is 6f per cent on the rental value. Under 
this rate, if the rental value of a store building was $3,000 per year 
the tax would amount to $200. The total tax derived from this 
source amounted to about $270,000 in 1911. 

While the business tax in Winnipeg does not give entire satis- 
faction, it is regarded with greater favor than the personal property 
tax. 

TAXATION IN SASKATCHEWAN 

Saskatchewan, the first province west of Manitoba, imposes no 
provincial tax on real or personal property. The provincial revenues 
are derived from sources similar to that of Manitoba. The power to 
tax real estate and to impose business and income taxes is delegated 
to the municipalities, but they are not authorized to tax personal 
property. Land is assessed at full value, but buildings and improve- 
ments cannot be assessed at more than 60 per cent of full value. 
Under a law passed in 1910 cities and villages may reduce the assess- 
ment on buildings and improvements 15 per cent per year until 
entirely eliminated. This law will enable cities and villages to bring 
about entire exemption of buildings and improvements within a 
period of four years if they so desire. Many of the cities and villages 
are taking advantage of this provision of law and will eventually 
entirely exempt this class of property from taxation. 



PUBLIC FINANCE AND TAXATION 885 

The business tax in the cities of Saskatchewan is based on the 
floor space occupied by the business. Businesses are classified and 
a different rate applied to each class. The rate of assessment varies 
from 50 cents to $8 per square foot, according to the class of business. 
The lowest rate is on flour mills and sash and door factories, and the 
highest on bankers, brokers, and financial institutions. The business 
tax seems to give general satisfaction. 

An interesting example of the working of the two systems of 
taxation — taxing land and improvements and taxing land only — 
was exemplified in the city of Lloydminster, half of which is in 
Saskatchewan and half in Alberta. That part of the city which 
is in Saskatchewan levied a tax on buildings and improvements 
as well as on land, while the part in Alberta taxed the land only. 
The result was that the Alberta side forged ahead of the Saskatche- 
wan side, and while most of the retail business was done in the 
latter, all of the better class of residences were built on the Alberta 
side. 

Commenting on the exemption of buildings and improvements 
from taxation, the minister of municipal affairs of Saskatchewan 
in a report issued in 191 1 says: 

In connection with cities might be mentioned the growing interest in 
the single tax system and the application in our cities of some of the prin- 
ciples propounded by Henry George. It has often been stated, and should 
be as often repeated, that the public-spirited owner of a lot, who erects 
thereon a building which improves the street and enhances the value of 
the surrounding property, should not be made to pay a penalty by way of 
taxes as a result of his efforts and enterprise while the neighboring land 
owner, who keeps vacant the adjoining lot for speculative purposes, enjoys, 
without effort on his part, the fruits of another's enterprise in making 
proper use of his holding. On the other hand, the fact is not to be over- 
looked that a building is more of a charge on the municipality by way of 
police and fire protection than is a vacant lot. It has many opponents in 
eastern provinces, but the examples set by the cities of Vancouver and 
Edmonton and the sentiments in this regard expressed by many leading 
municipal men in the province go to show that it has many strong advocates 
in western Canada. 

TAXATION IN ALBERTA 

The tax system of Alberta is similar to that of Saskatchewan, with 
the difference that buildings and improvements are now exempt from 
taxation in almost the entire province. Except in one or two cities, 
personal property is also exempted from taxation. A peculiar feature 



886 MATERIALS FOR ELEMENTARY ECONOMICS 

of the Alberta taxing system is a tax levied in rural municipalities at 
so much per acre without regard to the value of the land. In such 
municipalities a tax of one and one-quarter of a cent per acre is levied 
for educational purposes, and an additional tax varying from ij 
cents to 5 cents an acre for general purposes. A tax levied on the 
acre principle has little to commend it, but as the rate is quite low 
it seems to be accepted without much criticism. 
^ In Calgary, the principal city of Alberta, land is assessed at 
full value. Prior to 1909 buildings and improvements were assessed 
at full value. In 1909 the assessment was made at 80 per cent, in 
1910 at 50 per cent, and in 191 1 at 25 per cent of full value. Under 
a recent law the assessment on buildings and improvements must be 
reduced at least 10 per cent each year until entirely eliminated. 

Edmonton, the capital city of the province, is the only city of 
importance in the Canadian West that has adopted the single tax 
system in its entirety. A tax on land values alone is the only tax 
levied in that city. The city has had a marvelous growth in the 
past few years, but whether or not such growth has been due in 
part to its tax system is a question of some dispute. That it is 
giving general satisfaction is evidenced by the fact that nearly every 
resident of the city is an ardent single taxer. 

TAXATION IN BRITISH COLUMBIA 

There is no provincial tax on real estate in British Columbia, 
except in unorganized districts. A provincial tax, however, is levied 
on personal property and incomes. Household goods, money and 
credits, and several other classes of personal property are exempt from 
taxation. Land for purposes of taxation is classified as improved, 
wild, timber, and coal lands, and a different rate of taxation imposed 
on each class. The rate for the revenue year of 1910-1911 was one- 
half of I per cent on the assessed value of improved lands, 4 per cent 
on wild lands, 2 per cent on timber land, and i per cent on worked 
and 2 per cent on unworked coal lands. Mines are taxed on the 
output, the rate being 2 per cent on the value of the ore mined. 

In 191 1 a royal commission on taxation was appointed to investi- 
gate the revenue system of the province and to make such recom- 
mendations as it deemed expedient for the improvement of its taxing 
system. After a careful investigation, the commission recommended, 
among other things, the abolition of the personal property tax, and 



PUBLIC FINANCE AND TAXATION 887 

the tax on buildings and improvements on lands. On the latter 
question the commission says: 

Further, it has been argued, again as a matter of principle, that improve- 
ments on lands should be exempt from taxation altogether, and that the 
basis of valuation for the purposes of taxation should be the reasonable 
sale price of the land in a state of nature, due regard being had in fixing 
the price to all the conditions as to location, facility of access, fertility, 
and so on, that would influence a purchaser. On such a theory it would 
follow that all lands of the same class or character would not necessarily 
be valued at the same rate, and also the use to which the owner may put 
the land would not be taken into account. One might put a building on his 
land; another might grow hay; another might use his as a pasture. All 
these uses would be beneficial to the community, but, according to such 
theorists, they ought not to be the determining causes of the value of the 
land. If they were, the value would fluctuate with the changing uses to 
which the land might be put from time to time. 

Further, it has been contended that an improved piece of land should 
be valued for purposes of taxation at the same value as a similar piece of 
unimproved land, but that in valuing the improved land the value of the 
improvements should not be considered except for the purposes of arriving 
at the value of the land itself, and that this true value should be the selling 
value of the land subject to deduction for the present value of the improve- 
ments thereon It has been urged that the taxation of improve- 
ments, like the taxation of personal property, would be a penalization of 
thrift and energy, and ought to be abolished in a community whose chief 
aims are progress and the development of all kinds of industry. 

Finally, it has been maintained that the exemption of improvements 
from taxation would more especially relieve the farmers and the agricul- 
tural classes generally, who, in the judgment of your commissioners, should 
be especially encouraged, the prosperity of no other class being so essential 
to the best interests of the province at large. 

Largely as a result of the report of the royal commission an 
amendment to the tax laws of the province was enacted under which 
no tax will be imposed on buildings and improvements on lands or 
on personal property after January first of the coming year. 

Vancouver, the metropolis of British Columbia, was the first 
city in Canada to exempt buildings and improvements on land 
from taxation. The first step toward exemption was taken in 1895 
when the assessment on improvements was reduced to 50 per cent 
of full value. This was followed in 1906 by an additional decrease 
of 25 per cent, and in 1910 entire exemption was brought about. 



888 MATERIALS FOR ELEMENTARY ECONOMICS 

The result, it is claimed was magical. There was an immediate leap 
forward in local prosperity, huge buildings at once began to rise up 
where shacks had stood, and the city grew in population by leaps 
and bounds. Ten years ago it had a population of less than 27,000; 
today it exceeds 150,000. In 1901 the assessed value of land was 
less than $23,000,000; today it exceeds $100,000,000. That the 
marvelous growth of the city is entirely due to its taxing system is 
not claimed, but that it has stimulated and aided such growth is 
generally admitted. 

In Vancouver, as elsewhere, some criticism of the principle of 
exempting buildings is heard because of the claim that as buildings 
increase in size and number there is a corresponding increase in 
the cost of police and fire protection and other public service, and 
that it is unfair to require the land to bear this added burden. 

In answer, it is contended that buildings increased the value of 
the land — the adjoining vacant lot as well as the lot on which the 
building is erected — and that therefore the added burden should 
justly fall on the land. They point out that it is land, not build- 
ings, that increases in value in a growing city; that police and fire 
protection and other public service are not elements of value; that 
such service neither increases nor decreases the cost of building, 
and therefore in justice should not be charged to the building. 

Whatever merit there may be in either contention, it is but fair 
to add that a large majority of the people of Vancouver seem to 
be strong advocates and supporters of the principle of exempting 
buildings and improvements from taxation. 

GROWTH or THE SINGLE TAX PRINCIPLE IN WESTERN CANADA 

The most striking feature in a study of tax reform in western 
Canada is the strong trend throughout the entire country in the 
direction of the single tax principle. That so far it is working satis- 
factorily wherever tried is generally admitted, even by opponents of 
the principle. In no district in which the principle has been applied 
is there any noticeable desire to return to the old system. 



PUBLIC FINANCE AND TAXATION 889 

256. THE SINGLE-TAX ARGUMENT' 

THE ARGUMENT 

The argument in the case may be put briefly as follows: 
The three economic legs necessary and sufiicient whereupon the 
single tax stool may firmly stand are found in three generic peculiari- 
ties quite exceptional in their nature, which distinguish land from 
houses or other man-made products. The failure to recognize this 
distinction is, we believe, sufficient to account for the crookedness 
of present systems of taxation. Such a recognition must lie at the 
very foundation of any just system of the future. 

These three attributes, firmly grounded in orthodox economics, 
are, in economic language, as follows: 

a) The site value of land is a social product. 

b) A land tax cannot be "shifted." 

c) The selling value of land is an untaxed value. 

These three fundamentals are worthy of brief separate considera- 
tion. 

a) First in order is the fact that land value is a social product, i.e., 
it is created principally by the community through its activities, 
industries, and expenditures. The value of land is based primarily 
upon economic rent, defined as "what land is worth for use," what it 
would command in the open market. 

Strictly speaking this "worth for use" usually attaches not to the 
land itself, not to the earth's surface, not to the inherent capabilities 
of the soil, not to light and air or other bounties of nature resident 
in the land, but to scores of things exterior to the land and through 
it made available for use, so that, as applied to urban land, the follow- 
ing would be a more accurate definition: 

Ground rent is the annual value of the exclusive use and control 
of a given area of land, involving the enjoyment of those "rights and 
privileges thereto pertaining" which are stipulated in every title deed, 
and which, enumerated specifically, are as follows: right and ease of 
access to water, health inspection, sewerage, fire protection, police, 
schools, libraries, museums, parks, playgrounds, steam and electric 
railway service, gas and electric lighting, telegraph and telephone 
service, subways, ferries, churches, public schools, private schools, 

' Adapted from C. B . Fillebrown, "The Single Tax," in State and Local Taxation, 
Addresses and Proceedings of the First National Conference of the National Tax 
Association (1907), pp. 287-91. The Macmillan Co., 1908. 



Sgo MATERIALS FOR ELEMENTARY ECONOMICS 

colleges, universities, public buildings — utilities which depend for 
their efficiency and economy on the character of the government; 
which collectively constitute the economic and social advantages of 
the land ; and which are due to the presence and activity of population, 
and are inseparable therefrom, including the benefit of proximity to, 
and command of, facilities for commerce and communication with 
the world — an artificial value created ^primarily through public 
expenditure of taxes. In practice, the term "land" is erroneously 
made to include destructible elements which require constant replenish- 
ment; but these form no part of this economic advantage of situation 
or site value. 

Consequently ground rent may be said to result from at least 
three distinct causes, all of which are connected with aggregated social, 
as distinguished from individual, activity: (i) public expenditure; 
(2) quasi-public expenditure; (3) private expenditure. Thus their 
very nature and origin would seem to point to land values as peculiarly 
fitted to bear justly the burden of taxation. 

b) Second in order is the fundamental fact that a tax upon ground 
rent cannot be shifted upon the tenant in increased rent. The argu- 
ment in the case may run thus: Ground rent, "what land is worth 
for use," is determined not by taxation, but by demand. Ground 
rent is the gross income, what the user pays for the use of land; a 
tax is a charge upon this income, similar in its nature to the incum- 
brance of mortgage interest. It is a matter of everyday knowledge 
that even though land be mortgaged nearly to its full value, no owner 
would think to rid himself of the mortgage interest that he has to pay 
through raising his tenant's rent by a corresponding amoimt. Mort- 
gage interest is a lien upon land held by an individual; similarly, a 
tax may be conceived most clearly as a lien upon land held by the 
state. Both affect the relations between owner and mortgagor, and 
between owner and state respectively; neither has any bearing upon 
the relations between owner and tenant. "Tax" is simply the name 
of that part of the gross ground rent which is taken by the state in 
taxation, the other part going to the owner; the ratio these two parts 
bear to one another has no effect upon the gross rent figure, which is 
always the sum' of these two parts, viz., the net rent plus the tax. 
The greater the tax the smaller the net rent to the owner, and vice 
versa. Ground rent is, as a rule, "all that the traffic will bear"; 
that is, the owner gets all he can for use of his land, whether the tax 
be light or heavy. Putting more tax upon land will not make it 



PUBLIC FINANCE AND TAXATION 891 

worth any more for use. If the market value of a lot of land for 
use is $300 a year, a tax of $100 will not make it worth $400 a year. 

These two propositions (a) that land value is a social product, and 
(b) that a tax upon land cannot be shifted by the owner upon his 
tenant in increased rent, are well settled in the professional mind. 

c) Third and last is the fact, a necessary corollary of the second, 
that the selling value of land is an imtaxed value, a proposition that 
has received the definite approval of upwards of fifty leading Ameri- 
can teachers of economics and has been seriously questioned by but 
two or three of the three hundred to whom it has been submitted. 

Every purchaser of a piece of property knows, without argument, 
that he is governed as to the price he will pay, not by the gross income, 
but by the net income that will remain to him after all charges and 
incumbrances by way of mortgage interest or tax have been discharged. 

To illustrate: Assuming a piece of land worth $300 a year for 
use to be free of all charges and incumbrances, and assuming the 
current rate of interest to be 5 per cent per annum, a purchaser 
would buy the lot for $6,000, because interest upon that sum would 
amount to the stipulated $300 a year. But assume that, on the con- 
trary, it is found to be subject to a mortgage of $2,000, upon which 
the annual interest charge is $100; then he will buy the land, not at 
$6,000, but at $4,000, the value of the equity remaining after mortgage 
interest has been paid. 

But assume further that this lot of land, besides being subject 
to a mortgage of $2,000, is subject also to an established tax of $100, 
which charge the purchaser must also assume. He will then purchase 
the land not at $4,000, but at $2,000. The tax charge of $100 and 
the mortgage interest charge of $100 respectively reduce the selling 
price of land by the same amount, $2,000. The mortgage and the 
tax together therefore reduce it by $4,000; and the purchaser will 
buy the land at $2,000, the value of the equity that remains after 
both mortgage interest and tax have been paid. This $2,000 is the 
capitalization of the annual value of the lot after all charges have 
been met. The gross value is the taxed value. The net value is an 
untaxed value. 

It follows from the above too brief analysis that, under the present 
system, the selling value of land is an untaxed value and the land 
owners who invest today are entirely exempt from taxation. 

As this exemption of the present owner holds true today, so it will 
be true in future of each new purchaser subsequently to the imposition 



892 MATERIALS FOR ELEMENTARY ECONOMICS 

of any new tax. It is in the very nature of things that the burden 
of a land tax cannot be made to survive a change of ownership. 

But when we turn to the case of the taxation of houses we find that 
no parallel appears. Whereas a tax upon the lot could not, in the 
nature of things, increase its annual rental, or cost for use, a similar 
tax upon the house is added directly to the annual cost to the user. 
If a house costing $6,000 to build is subject to a tax of $100, this 
amount must be paid annually in addition to an interest charge of 
$300. Increasing or decreasing taxation upon the lot has no influence 
upon its annual cost to the user; while increasing or decreasing the 
tax upon the house increases or decreases in exact proportion the 
annual cost to the user. 

The moral of this illustration is that a tenant gets for use annually 
$300 worth of land for $300, and a house costing $300 for $400. In 
other words, a house tax of $100 takes in taxation $100 a year of the 
user's income. A land tax of $100 takes in taxation no part of the 
income of the present owner, provided that he purchased the land 
after the tax was imposed. 

The beauty of this illustration is that while land stands for every- 
thing except the products of labor, a house is here made to stand as 
the representative of any and all products of individual labor, and 
the illustration thus becomes all inclusive. 

The practical exemption of the selling value of land is vital in its 
bearing upon any proposition for obtaining an increased revenue 
from that source, accompanied by a corresponding exemption of 
other property. 

In the light of the foregoing argument it is interesting to consider 
what one city, the city of Boston, might have done to promote busi- 
ness and secure equity through a sound and just system of taxation. 

The following estimate indicates the gigantic proportions of the 
factor ground rent, and its sufficiency to meet all reasonable costs of 
government economically administered, not only without impoverish- 
ing the land owner, but without subjecting him at any time to a tax 
more burdensome or more continuous than that borne by every 
man that has lived in a house since a house tax was invented. 



PUBLIC FINANCE AND TAXATION 893 

The gross ground rent of the land of the city of Boston is by 

careful estimate more than $50,000,000 

Of this amount there is already taken in taxation 10,000,000 



Leaving to the land owners of today a net ground rent of ... . $40,000,000 

The fact that this sum amounts to $68 per capita, or $340 
per family, will help the mind to grasp its magnitude as a 
factor in the distribution of wealth. 

State and local taxes upon improvements, buildings, personal 
property, and polls amount to something over 11 ,000,000 



If this additional amount were taken from rent there would 

still remain to the land owners a balance of $29,000,000 

or $48 per capita, or $240 per family. 

Coming to the consideration of the means by which more revenue 
may be gradually raised from the land and the burden of taxation 
made more proportionate and reasonable, choice may be had from a 
variety of methods. The one most frequently suggested is that of 
appropriating by taxation part or all of the future increase in land 
values. If Boston should decide to start today and take in taxation 
her future unearned increment above the present value of $653,000,000 
the case would be exactly the same as that of some new community 
where no value has accrued, a situation in which the ideal justice 
of the single tax is so frequently conceded. 

If Boston had decided ten years ago upon the large annual increase 
of one dollar per thousand each year for ten years in the rate of 
taxation upon its land, coupled with similar reduction in rate upon 
buildings and personal property, that city would be raising today 
from its land $10 per thousand more than it does now, or. 

Land $653,000,000, at $10, an increase of more than $6,000,000 

The increase in land value in the same ten years was 
$188,000,000, 5 per cent of which is over $9,000,000 

And Boston would be taking in increased taxation today only 
two-thirds of its land increment for the same ten years. 

Under this supposition the $468,000,000 valuation of ten years 
ago would still remain untouched by taxation, as is now the case 
with substantially the whole $653,000,000 valuation of 1907. 

The foregoing Boston figures are submitted simply for purposes 
of illustration, not in any way as support of a specific recommenda- 
tion. 



894 MATERIALS FOR ELEMENTARY ECONOMICS 

If the preceding argument is valid, it establishes the fact of gross 
inequality in the incidence of taxation as between land values and 
improvement values. If it is admittedly wrong that present land 
values should be untaxed, how can such fiscal wrong best be righted ? 
Begin at once a transfer of taxes from improvements to land so 
gradual that two old injustices will cease for every new one that is 
begun, until this untaxed value is made to bear at least its propor- 
tionate burden at the same rate with other things. 

In conclusion I wish to emphasize this basic fact: that the burden 
of a land tax cannot be made to survive a change of ownership has 
in turn this corollary of its own, viz., that a new tax burden if imposed 
today would in one generation, by sale or by inheritance, cease to be a 
burden. If all taxes are finally collected from the land owner, he 
will then be the only man taxed. If another generation serves to 
let his successor out from under the burden, who will remain under it ? 
Ground rent, economic rent, being an equivalent for value received, 
is not a burden, and if all taxes are ultimately taken from rent, it 
follows that in the course of two or three generations taxation may 
cease entirely from being a burden upon anyone. 

If professional economists and taxation experts will at once, to 
use a nautical phrase, quit their dead reckoning, and steer their craft 
by the single-tax polestar, time and tide will do the rest. 

257. THE LAND-VALUE TAX AS A SOCIAL REFORM' 

The single tax is least of all a taxing measure. This is but inci- 
dental, though essential, to a larger social ideal; an ideal as far- 
reaching in its consequences as Socialism, but far simpler in its 
application. Its benefits depend on no revolution, but are realized 
as fast as the tax is applied. And it is of the Land- Value Tax as a 
social philosophy that we ask your criticism and suggestion. 

TAXATION or LAND VALUES WILL — 

First, put an end to idle land holding. — It will destroy speculation. 
It will make it impossible to hold land out of use. As the British 
Chancellor of the Exchequer said: "It will make the dog in the 
manger pay for his manger." The owner will have to use his 
land, and use it in the most productive way, in order to pay the taxes. 

■ From The Taxation oj Land Values, a pamphlet issued by the Joseph Fels 
Fund Commission. 



PUBLIC FINANCE AND TAXATION 895 

That increasing land-value taxes check speculation and stimulate 
use is a commonplace of experience. 

Second, cheapen land. — First. Many owners will sell their unused 
land in order to be relieved of the burden of taxation. 

Second. The taxation of rent will lessen the value of land, for 
economists agree that the selling value of land is its untaxed value. 
For taxes levied on land values reduce rent. They fall on the land- 
lord and cannot be shifted. Economic rent is what is left after the 
payment of taxes. Thus, the competition of sellers and the reduc- 
tion of rent will cheapen land and throw upon the market idle holdings 
that will be available for industry, agriculture, and home-building. 

Third, solve the housing problem. — The housing question is a land 
question, not a house question. It exists only where land values are 
prohibitive. If we cheapen land we open it up to use; if we tax it 
heavily enough we compel it to be built upon. Idle land holding is 
only possible where* the tax rate is low. Increase the rate and the 
land is put to productive use. Moreover the removal of taxes on 
improvements will encourage, improvements just as the present 
taxation of improvements discourages them. Under the land- value 
tax he who built would be rewarded, while he who refused to do so 
would be fined. The house tax is like the old French window tax, 
which caused the peasant to close his cottage to the sunlight. 

The taxation of land values would cut like a surgeon's knife at the 
root of city land monopoly. Shacks and tenements would be im- 
proved, while new structures would increase the housing capacity of 
the city. The tenement and the slum would disappear. No longer 
would thrift be penalized and the idle speculator be rewarded. 

Rents would fall in consequence of the increased supply of houses. 
Building materials in transition from the mine, the forest, and the 
factory would be free from taxes, as would houses, office buildings, 
machinery, and factories. All of these forces together would solve 
the housing question in a few years' time. They would solve it by 
the law of competition. 

Fourth, destroy all monopolies bottomed on land. — The United States 
Steel Corporation has capitalized its iron ore and coal fields at $800,- 
000,000. Twenty-five years ago they were farming lands of little 
value. The anthracite coal combination is capitalized at hundreds 
of millions by virtue of its ownership of all the anthracite coal in the 
East. The Standard Oil Company is a monopoly because of its 
railway and land privileges. Direct land-value taxes upon these 



896 MATERIALS FOR ELEMENTARY ECONOMICS 

resources could not be shifted. They would be deducted from 
monopoly profits. More than this, idle mineral resources would be 
forced into use, while labor would be given new opportimities for 
employment. With the tax sufiiciently high, the nation would regain 
the splendid resources that have been in large measure filched from 
it by stealth and illegal means. The rent, which now goes to 
monopoly, would be converted in taxes to the state. 

Fifth, improve the condition of capital and labor. — What would 
labor gain in the new dispensation ? Obviously, cheap land means 
high wages. The history of all new countries proves this. And if 
the city, suburban, and agricultural land owners were taxed on the 
opportunities held out of use, they would use their land or sell it. A 
demand for labor would arise : a demand for miners and agricultural 
workers, for masons, carpenters, and builders. All other industries 
would be awakened into life in the process. All business would be 
stimulated. In a short time — a very short time — there would be more 
jobs than men seeking them. Now, the entire continent is appro- 
priated, yet it peoples but twenty-three persons to the square mile. 
America could home ten times its present population were the natural 
resources opened to use. This the taxation of land values would do. 
It would increase opportunity, as did the discovery of the continent 
four hundred years ago. 

Sixth, effect a just distribution of wealth. — Even a slight increase in 
land-value taxes would stimulate the use of land. A doubling of the 
present rate would usher in an era of industrial prosperity. Were the 
tax increased to the full rental value, there would be but two claim- 
ants to the wealth produced — capital and labor. The landlord would 
disappear and labor and capital would each get the full value of its 
product. There would be plenty of alternatives for employment 
in this country. Wages would rise to the full product of men's toil. 
The opening up of new opportunities all about us, and the increase in 
wages would awaken other industry. It would flood mills, factories, 
mines, and railways with business : for the wants of mankind know 
no limit. 

Industry would reflect the changed conditions. For prosperity 
means increased demands for all those goods which labor and capital 
produce. Were the incomes of the salaried, prof essi<!)nal, and working 
classes doubled tomorrow there would arise an era of prosperity the 
like of which the world has never known. For the purchasing power 
of America would be doubled in consequence. And in the last analysis 



PUBLIC FINANCE AND TAXATION 897 

prosperity depends not on the cheapness of labor but on the amount 
of money which the consuming classes have to spend. Industrial 
prosperity depends on the well-being of the great mass of the people 
rather than of the few. Through the same influences child labor 
would disappear, vagrancy would be reduced to a minimum, and 
crime would be checked at its source. For child labor, vagrancy, 
and crime are not to be found among those who are well-to-do. 
They are the costs of poverty. 

Seventh, reduce the cost of living despite increased wages. — The 
federal revenues, amounting to $700,000,000 a year, are collected from 
consumers. They increase the cost of living. It has been estimated 
by Professor William G. Sumner of Yale and John A. Hobson of 
England, that the indirect cost of the tariff, due to the monopoly 
prices it makes possible, is approximately a billion and a half dollars a 
year. This is equivalent to $100 a family. The abolition of indirect 
taxes alone would reduce the cost of living to that extent, while the 
abolition of the taxes now levied on houses, improvements, tools, 
machinery, and all other labor products would reduce it still further. 

LAND-VALUE TAXATION IS A SOCIAL PHILOSOPHY 

Land-value taxation would socialize from fifty to seventy-five 
per cent of the wealth of America. It would require no new machinery 
to do this; no state control of industry would be necessary. It would 
open up the resources of America to those best fitted and having a 
natural right to use them. It would eliminate the speculator and the 
land monopolist as toll-takers in distribution. It would destroy 
private monopoly. It would create opportunities for tens of millions 
of workers, and would stimulate the production of wealth beyond 
our present dreams. It would equitably distribute the wealth pro- 
duced and would increase many fold the amount available for distri- 
bution. We believe it would bring about the rapid evolution of a 
society in which want and the fear of want, poverty and its attendant 
evils of vice, disease, and crime would disappear. 



XX. SOME PROGRAMS OF SOCIAL REFORM 

258. PROFIT-SHARING IN THE N. O. NELSON 
MANUFACTURING CO.' 

The N. O. Nelson Manufacturing Co. of St. Louis adopted profit- 
sharing beginning with 1886, when it put in the pay envelopes a 
5 -line notice that after the commercial rate of interest had been paid 
on the net capital the remaining profit would be divided by equal 
percentages on the stock and on the salary and wages of all who had 
worked six months within the year. The result was a dividend of 
5 per cent on wages, which was paid in cash. The next year yielded 
10 per cent, which was also paid in cash. The announcement was 
then made that in the future the dividends would be paid in stock. 
Following the panic of 1893, dividends on stock and on wages were 
suspended until 1904, at which time a dividend of 4 per cent was 
paid for each of the years of this suspension. It was then announced 
that capital would be allowed 6 per cent, but no further share in the 
profits, and that the customers would also be taken into the arrange- 
ment, thus making it completely co-operative. The customers' 
dividend is figured, not on the purchases, but on the gross profits. 
In the years from 1904 to 191 2, inclusive, the dividends have ranged 
from ID to 20 per cent on salaries and wages, and from 15 to 45 per 
cent on the gross profits of customers' purchases. Employees and 
customers together now own about two-thirds of the capital which, 
including the surplus, amounts to about $1,750,000. The directors, 
except Mr. Nelson himself, are all employees of various kinds, and 
at times the customers are represented on the Board. There are now 
about 1,200 employees, of whom approximately three-quarters are 
factory workers in St. Louis, Mo., Leclaire, 111., Bessemer, Ala., and 
Noblesville, Ind. The remainder are business employees at these 
places or at branch houses in Memphis, Tenn., Houston, Tex., Los 
Angeles and San Diego, Cal, Salt Lake City, Utah, and B/ueblo, Colo. 

In 1890 the company founded the town of Leclaire, 111., 18 miles 
northeast from St. Louis. There it built its principal factories, and 
houses for employees who wanted them, and provided desirable 
public facilities. Leclaire now has a population of about 1,000, has 

' Information communicated by Mr. N. O. Nelson. 



SOME PROGRAMS OF SOCIAL REFORM 899 

no political organization, no jail or policemen or other officers, and 
has never had need of any. It has a public water supply, electric 
light, a public hall, baseball grounds, a bowling alley, a billiard 
room, and a 7-acre artificial lake for boating, skating, and swimming. 
The lots are sold to anybody, whether employee or not. The houses 
are built according to agreed plans on monthly instalments, the com- 
pany having only two or three renting houses. The houses are 
mostly of 3 to 6 rooms, built on lots of from 50 to 100 feet front, by 
about 160 feet in depth. They are subject to no rules whatever, 
but are all well kept, and some are as handsomely landscaped as 
those of rich people elsewhere. Mr. Nelson has made his own home 
in Leclaire since 1897. 

The profit-sharing as well as the town-making have been eminently 
satisfactory. No one has thought of changing the system. Mr. 
Nelson is convinced that with ordinary common-sense, provision for 
steady work and owned homes, and with provision for social life, 
there is no need of policemen, jails, or poorhouses, and almost none 
for doctors, lawyers, or courts. The employees and neighbors have 
a co-operative store conducted on the Rochdale plan from which they 
buy at the usual prices, get 6 per cent interest on their investment, 
and have a regular dividend or rebate of 10 per cent on purchases. 

259. PROFIT-SHARING AND LABOR COPARTNERSHIP' 

The scheme of my own firm, J., T. & J. Taylor Ltd., woolen manu- 
facturers, Batley, based, like others, on the theory that profit is the 
joint product of capital and labor, is as follows: The first claim of 
labor (in which I include all forms of human exertion) is met during 
the year by the payment of salaries and wages. Next comes the 
first claim of capital to 5 per cent interest as a first charge upon any 
profits shown in the balance-sheet at the end of each year. If there 
are not profits capital gets nothing. If, after paying 5 per cent 
interest on all shares (the majority of which are now owned by our 
employees), a divisible balance remains, it is apportioned between 
capital and the total amount paid during the year for labor according 
to their respective amounts, that is, at the same rate per cent. To 
employees who are not less than twenty-one years of age, who have 
been five years in our employ, and have retained their bonus shares 

■ From Theodore Cooke Taylor, "Profit-Sharing and Labor Copartnership," 

in The Conlemporary Revicic, CI, 630-31 (May, 1912). 



900 MATERIALS FOR ELEMENTARY ECONOMICS 

to the amount of half their yearly wages, we are now giving double 
bonus. The total amount of such wages, therefore, has to be reckoned 
double. Let me illustrate. 

Suppose our capital were £160,000, that during the year we 
had paid in salaries and wages £90,000, and that workers who had 
earned one-third of that were entitled to double bonus. We should 
add £30,000 to the £90,000 actually paid, thus making a total labor 
item of £120,000. Suppose our divisible profits were £29,000: we 
should first declare an interest dividend of 5 per cent (that is £8,000) 
on the capital, leaving £21,000 to be further divided between capital 
and wages at 7^ per cent. Thus capital, or shares, would get a total 
dividend (including interest) of i2| per cent and labor a bonus of 
7I per cent. The workers specially qualified, who earned one-third 
of the £90,000 actually paid in wages, would get double bonus, that 
is, at the rate of 1 5 per cent, while the bonus on the remaining £60,000 
wages paid would be at the rate of 7I per cent. (These labor bonuses 
have, so far, been given in new fully-paid shares of the company, 
dividends upon which are paid in cash.) But as only those who 
remain the whole year are entitled to bonus, we place the bonus 
accruing upon the wages of those with us only parts of the year to 
a special fund called the Workers' Benefit Fund, administered in 
various ways for the benefit of the workers as a whole. For example, 
needy cases are helped, convalescent and consumptive cases assisted, 
and benefits extended to our mutual sick-club members. Bonus 
shares confer all financial rights, but do not carry votes. They can 
be held only by employees, and so long as a man remains in the 
company's employ he can sell only the surplus of his holding over 
the amount of his annual salary or wages. Copartners who leave 
must sell their shares to some of their copartners remaining. Com- 
menced in 1892, the system, the first three years, applied to managers 
and foremen only. For the last seventeen years all have been included 
who have completed a calendar year with the company. The divi- 
dends have averaged about 10^ per cent on capital and 7 per cent on 
labor. There is nothing down in our balance-sheet for good-will, 
and there is no inflation in valuations. On the usual company basis 
the capital would have figured as larger; the same totals of profits, 
therefore, would have yielded lower rates of dividend on both capital 
and labor. 

It is often asked: What about losses? I can speak from expe- 
rience. In 1897 and 1898 we had no dividend, and I have yet to 



SOME PROGRAMS OF SOCIAL REFORM 901 

hear the first word of reproach or mistrust from any one of my co- 
partners. Ours is an old-established, but highly technical, business, 
difficult to manage. In twenty years the number of our workers has 
increased from 600 to i ,400, and we have apportioned as the workers' 
share near £100,000. The system has, during that time, been a 
benefit to all concerned. 

260. A PROMISING VENTURE IN INDUSTRIAL PARTNERSHIP' 

At some point in the scale of remuneration of every large com- 
pany occurs a natural division of the workers into two groups. Below 
the point are those workers whose labor is mainly of a routine charac- 
ter. By special care or effort they can save from their own time or 
energy or material. They can turn out the same product in fewer 
hours, or with less effort, or with less waste of materials or power. 
The problem of their remuneration is essentially one of paying wages 
in proportion to output, and that problem is perhaps best met at 
present by some safeguarded variety of piece wage. 

Above this group are those workmen who can exercise imagina- 
tion, often enough men promoted for their fitness from the lower 
group. They have initiative, they originate. They are men who 
can think calmly and clearly of two things at once. They can, by 
mechanical rearrangement, secure real economies, economies inde- 
pendent of extra strain by workmen. They can exercise discretion 
in buying materials or selling finished product, and, by their under- 
standing of a complicated situation, may exercise their discretion 
wisely and profitably. For their success they are further promoted 
in position or salary. From the most successful of them the higher 
officers and the directors of the company are naturally chosen. Since 
increased profits of the company are so intimately dependent on the 
energies of the entire active managing body, and not on stockholders 
who send proxies or have an otherwise external relation, should not 
the entire increase of profits of the company go to these men ? That 
they should, and that thereby the finest morale of the company may 
be preserved and indefinitely continued, has been the belief of the 
rein corpora tors of the Dennison Company. 

The stockholders of the old company became under the new 

' From Robert F. Foerster, "A Promising Venture in Industrial Partnership," 
in the Annals of the American Academy of Political and Social Science, XLIV, 97- 
103 (November, 191 2). 



902 MATERIALS FOR ELEMENTARY ECONOMICS 

the owners of first preferred stock to the amount of $4,500,000, on 
which a cumulative dividend at the rate of 8 per cent is due. Pro- 
vision is made for the issue of second preferred stock in series, each 
series having an unchangeable rate of dividend not less than 4 per 
cent. The circumstances of the issue of this stock are stated below. 
After dividends on the first and second preferred stocks have been 
paid, there will be deducted annually from the remaining net profits 
5 per cent of the remainder for the purpose of buying in shares of 
first preferred stock upon favorable occasion. 

An issue of industrial partnership stock to the amount of $1,050,- 
000 is authorized. Such stock may be owned only by so-called 
principal employees, the group already described. They are persons 
who in the previous year have received for their labors (a) $1,200 
OT over and been seven years in service; (b) $1,500 and six years in 
service; (c) $1,800 and five years. Such principal employees receive 
shares of industrial partnership stock in a number proportional to 
their wages. Stock shall not be issued for cash, but shall represent 
profits of the company, and therefore be distributed without special 
charge to those whose peculiar efforts are chiefly, in the long run, 
the means of securing the profits. But no new issue or industrial 
partnership stock shall take place until a 5 per cent cash dividend 
has been paid on the outstanding industrial partnership stock. To 
insure the frequent, probably annual, issue of such stock, no cash 
dividend upon it shall ever exceed 20 per cent in one year. 

A crucial question in this connection is, how shall the issues of 
industrial partnership stock be apportioned ? Certainly by no human 
device can the final profits of a complex business be perfectly ascribed 
to individual workmen composing the business. Yet a working 
approximation seems not impossible. In the salaries that men get 
there is a kind of index to their comparative values to the business; 
no perfect index again, yet one that results from the best available 
discernment. Let him whose salary is twice that of another, receive 
twice the other's allotment of stock. Industrial partnership stock 
is issued in $10 denominations, so that many gradations of amount 
may be adequately expressed. 

Where ordinary remuneration is the basis of issues of new stock, 
there appears an incentive for each man to make himself worth more 
in the daily execution of his tasks and so to qualify himself for another 
position which would bring not only higher salary, but, correspond- 
ingly, a more liberal allotment of stock. 



SOME PROGRAMS OF SOCIAL REFORM 903 

Only active workmen still in service may be holders of industrial 
partnership stock. That is partly because of arrangements as to 
voting, presently to be described, but chiefly in order that future 
increments of profit may be divided only among those who may be 
regarded as responsible for them. Hence in case an employee leaves 
the company or dies, his stock may either be purchased by the com- 
pany for cash or converted by the company into second preferred 
stock paying an unvarying rate of dividend and never receiving an 
allotment of new stock. So the retiring employee may receive and, as 
the case may be, may bequeath to others a capital amount represent- 
ing his saved earnings, but he may not transmit a claim to increased 
future profits which he and his descendants have not helped to create. 
At the option of the company cash may be paid, instead of second 
preferred stock, to the retiring owner of industrial partnership stock. 

What this arrangement implies when read in the light of the 
position and destiny of the preferred stocks is the most interesting 
part of the Dennison scheme. In all probability a considerable 
amount of industrial partnership stock will be issued, but it may be 
some years before $1,000,000 will be outstanding. Until that date 
arrives, stockholders of all classes will vote according to the capital 
value of their shares, the holder of one share of first preferred stock, 
par $100, and the holder of ten shares of industrial partnership 
stock, par $10, will each have in so far one vote. The larger the 
amount of industrial partnership stock, the safer will be the return 
on the preferred stocks. When $1,000,000 of industrial partnership 
stock is outstanding, the preferred stocks will have sufiicient safety 
no longer to require a vote. Then their holders will cease to vote 
and the entire management of the concern will fall to the principal 
employees. These are the persons most fit to manage, the persons 
who have risen from the lower places, the persons qualified by proved 
ability and experience to manage the business. Hitherto they have 
been merely employees, and though performing some of the functions 
of managers, have not had corresponding authority and privileges in 
the conduct of the business. Henceforth, as part owners of the busi- 
ness, with an income, above wages, that is large or small according 
to the character of their management, they will have enough at stake 
to be trusted as sole managers. Should they fail in their task, reduc- 
ing, and then maintaining for some time, the dividends of the pre- 
ferred stocks below the stipulated rates, then the preferred stock- 
holders may resume the management, to retain it until the rates 



904 MATERIALS FOR ELEMENTARY ECONOMICS 

are restored. But for an extended period of inability to pay preferred 
dividends, such a period as proves that the assets behind the indus- 
trial partnership stock have disappeared, the first preferred stock- 
holders shall take over and permanently retain the voting power. 

Such collapse seems unlikely. Provisions for redeeming in 
cash the stock of persons leaving the business, and for buying in 
shares of the first preferred stock, should prevent the burden of fixed 
dividend charges from becoming excessive. Also, the checks upon 
the dividend rate of the industrial partnership stock should lead to a 
large increase in the outstanding amount of this more variable secur- 
ity. Having lost their vote, the preferred stockholders would become 
akin to bond creditors. The business would more and more approach 
the form of a pure industrial partnership. 

261. THE ROCHDALE PLAN OF CO-OPERATION' 

Modern co-operation is essentially democratic — a people's move- 
ment far more truly than either trade unionism, agrarianism, or even 
socialism in its prevalent orthodox form, can be. Its effective 
practice dates from the adoption of a specific business and social 
policy drawn up in 1844 by a group of 28 flannel weavers in Rochdale, 
England. The business principles of this association require detailed 
mention since, directly and indirectly, they have served quite largely 
as model for successful co-operative societies of every sort throughout 
the world. 

The Rochdale principles were: 

1. Open membership with shares of low denomination — usually at 
£1 or $5 each and payable by instalments^ so as to be within the 
reach of all. 

2. Limitation of the amount of shares to be held by any one member, 
to prevent wide inequality in financial status of members. 

3. Democratic government, each member to have but one vote, 
irrespective of the number of shares that he or she may hold. 

4. Sale of pure goods and fair measure at prevailing market price, 
to avoid arousing needlessly the destructive hostility of local 
merchants. 

5. Cash sales, to avoid loss through delayed payments and uncol- 
lectable accounts, to reduce bookkeeping costs, and to insure 
purchase of goods on most advantageous terms. 

' From James Ford, Co-operation in New England, pp. 6-8. Survey Associates, 
1913- 



SOME PROGRAMS OF SOCIAL REFORM 905 

Payment of not more than 5 per cent interest on shares, the rest 
of the profits, after deduction for depreciation and reserve, to go 
partly to an educational fund, partly to charity, and the remainder 
to be distributed to purchasers whether members or not, in pro- 
portion to their trade at the store. 



262. CO-OPERATIVE CREAMERIES' 

In its pure form a co-operative creamery association is an associa- 
tion of local milk producers who by combined capital in shares of 
low denomination build or purchase a creamery, primarily for the 
manufacture and sale of butter. Such associations pay a fixed, low 
rate of interest on shares and distribute other net earnings to milk 
producers according to the amount of butterfat in the milk they 
furnish. Furthermore, they grant each member but one vote, irre- 
spective of the number of shares he holds. 

There are also among creameries, exactly as among co-operative 
stores and factories, many organizations that bear the name "co- 
operative," but which differ from the pure type in that voting by 
shares is allowed. Such organizations have a certain "right to the 
name "co-operative," since they are formed by large bodies of small 
local producers, organized to save themselves from the evils of indi- 
vidual production and bargaining. When such societies keep their 
membership open to all honest producers of the locality who desire 
to join, and when they devote all earnings above 6 per cent interest 
on shares to increase the payment to patrons for milk, they are by 
intention co-operative and are so considered by the community in 
which they are situated, especially when compared with the pro- 
prietary or joint-stock creameries of small and exclusive membership 
which may exist in the locality. 

To the co-operative creamery, farmers within a radius of 10 miles 
or more may bring their cream or whole milk daily. All but the 
smallest creameries have "gatherers" who go from farm to farm 
among the patrons to collect the cream. Sometimes a compromise 
is effected where farms are inaccessible, and sub-stations are assigned 
to which farmers bring their cream, thus simplifying the gatherers' 

' From James Ford, Co-operation in New England, pp. 134-39- Survey 
Associates, 1913. 

[For another instance of co-operation in the disposal of agricultural products 
see Selection 98, "Co-operative Fruit Marketing."— Editors.) 



906 MATERIALS FOR ELEMENTARY ECONOMICS 

work and lessening the cost of this section of creamery expenditure. 
Once brought to the station the butter fat is separated by mechanical 
apparatus and is made over into butter. The process is simple; 
requires but small outlay of capital, $i,ooo to $3,000, and the employ- 
ment usually, aside from gatherers and sales agents, of not more than 
two employes within the creamery. 

One of the largest and most successful of these creameries is the 
Hampton Co-operative Creamery Association of Easthampton, 
Massachusetts, founded in 1881. It had in 191 1 43 shareholders, 
mostly of Yankee birth, who held among them $2,500 of capital 
stock in twenty-five-dollar shares. They own $3,000 worth of real 
estate free from mortgage and have a reserve of $4,623. Sales for 
the year 1910 amounted to $86,914 from the profits of which 6 per 
cent interest on shares was paid to members, the balance going to all 
patrons whether members or not according to the amount of butterfat 
in the milk they sold to the creamery. An average of 40 cents per 
pound was paid patrons for butterfat — a sum equaled by only one 
other of the reporting co-operative creameries of New England. 

The business of the society, according to the Daily Hampshire 
Gazette, is "one of the most prosperous business ventures in our town." 
During the year 1907 the society received 730,285 pounds of cream 
yielding 131,844 pounds of butterfat, and made 155,342 pounds of 
butter, an average of 496 pounds per day; $7,610 worth of cream 
was sold and $1,440 worth of buttermilk, which until very recent 
years was thrown away. A wholesale house of a neighboring city 
purchases their entire output. The butter is made in a light and 
clean basement room of a model New England farmhouse in East- 
hampton, under conditions which should satisfy the most exacting 
customer. The association has further established a deserved repu- 
tation among producers for absolute integrity by never during twenty- 
seven years having failed to send its checks to patrons for their milk 
on the day payment fell due. 

Patrons, many of whom are not stockholders, are admitted to 
annual meetings and are given opportunity to talk. 



SOME PROGRAMS OF SOCIAL REFORM 907 

263. CO-OPERATIVE STORES' 

The Riverside Co-operative Association is situated in Maynard, 
Massachusetts, a textile town with a population of 6,400. At the 
close of the fiscal year, December 31, 1909, the society comprised 
about 600 members — Americans, English, Scotch, Irish, Swedes, 
Danes, Finns, and French — workers in the woolen mills of the town, 
earning a typical wage of $10 to $15 a week. The capital stock in 
1910 was $14,710, divided into shares of $5.00 each, no member 
holding over 60. The real estate of the association, which consists 
of a large, three-story wooden building, was estimated at $11,000, 
mortgaged for $1,500; stock on hand was $8,600; there was also a 
reserve fund of $4,700. Total sales during 1908 amounted to $83,000. 
Besides 6 per cent interest paid on shares, an 8 per cent dividend was 
allowed on trade during the first half year, and a 5 per cent dividend 
in the second half year (January, 1908, to June, 1908). In all, the 
sum of $4,860 in dividends had been distributed during that year. 
Credit is given only to members. Seven of the 11 employees are 
shareholders. Attendance of 75 members at meetings can be counted 
upon. It is probable that no co-operative store in urban New Eng- 
land has a wider local influence among the English-speaking popula- 
tion of the community than has this association. By careful manage- 
ment, shrewd by-laws, and high ideals, it has continuously attested 
the value of the co-operative method. 

The largest workingman's co-operative society in New England 
today is the Lowell Co-operative Association (Sovereigns of Industry), 
of Lowell, Massachusetts. Organized in 1876, this society had in 
June, 191 1, about 2,200 workingmen shareholders, mostly Irish, and 
a capital stock of $13,895, in shares of $5.00 each. There was 
$26,400 invested in real estate free of mortgage. Sales of groceries 
and coal amounted to almost $220,000. Four per cent interest was 
paid on shares, 7 per cent dividends on shareholders' purchases, and 
5 J per cent to "members" — general patrons who pay 25 cents to 
the society and receive f of the regular dividend on purchases without 
owning shares. In all, from $10,000 to $15,000 has been distributed 
annually as dividends on purchases. Arrangements are also made 
with seven local dealers in clothing, boots and shoes, furniture, 
cutlery, and other wares for 7 per cent discount to stockholders. 

' From James Ford, Co-operation in New England, pp. 25-27. Survey Asso- 
ciates, 1913. 



9o8 MATERIALS FOR ELEMENTARY ECONOMICS 

This is apparently the oldest New England society that has secured 
and retained the trade discount system. Under continuous, pains- 
taking management this association has in twenty years progressed 
from ninth to first place in amount of annual trade. By democratic 
voting, by restriction of credit to members only, and by inducing 
its employes to become shareholders, it has made co-operation grow 
out of difficult racial material and in the choking environment of 
one of the largest mill towns of America. 



264. CAUSES OF THE FAILURE OF CO-OPERATIVE STORES 
IN AMERICA^ 

"In this country Co-operative Distribution has been marked 
by almost utter failure. So universal has been the disaster that has 
followed all attempts to save money in purchasing goods of any kind, 
that the name ' Co-operative Store ' has become to the ordinary mind 
a term of derision."^ 

The causes for this almost universal failure of the co-operative 
movement are manifold, and many of them are peculiar to this 
country and to the American people. 

Since its commencement, the co-operative movement in the 
United States has never been satisfactorily organized. Even to-day 
there are but three states which have any kind of an organization, 
and in none of these is it what it should be. Fought from all sides 
as are these co-operative enterprises, it is surprising to realize how 
few attempts have been made to organize them into protective 
associations. It is still more surprising to find the lack of informa- 
tion which exists among the co-operators relative to the whereabouts 
and the status of co-operative stores. Managers of associations in 
one county do not know that other similar organizations are to be 
found in the adjoining county, and when it comes to the matter of 
the co-operative movement in the state at large, there is no one who 
is able to give a complete list of the stores or their location. This 
is due primarily to the fact that the associations have no central 
organization to which they can make reports. In but three states 
are annual meetings held for the discussion of co-operative matters 

' Adapted from Ira B. Cross, "The Co-operative Store in the United States," 
pp. 45-50, in the Twelfth Biennial Report of the Bureau of Labor and Industrial 
Statistics, Wisconsin, 1905-6. 

* Barnard, Co-operation as a Business, p. 109. 



SOME PROGRAMS OF SOCIAL REFORM 909 

by the co-operators themselves, while but two attempts at holding 
a national convention have ever matured. The success of the latter 
in neither case was very gratifying. Compare these feeble efforts 
with the solid organizations of the retail grocers, the jobbers, and 
the wholesalers ! Annual conventions of co-operative societies should 
be held in each state. These associations should elect representa- 
tives to a National Co-operative Congress which should likewise 
be held each year. Without such conferences, without state and 
national organization, we may expect to see the continued failure 
of the co-operative movement. 

Another cause for the many wrecks which lie strewn over the 
field of Consumers' Co-operation is the fact that in times past there 
have been no wholesale houses from which the retail co-operative 
stores could obtain their supplies. They have been forced to pur- 
chase their stock from the same wholesale house as the other retail 
merchants. The latter have consistently been successful in forcing 
the wholesaler to discriminate against the co-operative stores, and 
the consequence has been that the latter have had to pay higher 
prices for all goods purchased. In some instances the wholesalers 
have absolutely refused to deal with the co-operators. These things 
cannot help but result in placing the latter at a disadvantage in the 
sale of goods to the public, and have been a fruitful source for the 
failure of these co-operative enterprises. Today we have two whole- 
sale houses for the co-operative stores, one of which is composed 
entirely of co-operative societies, and the other but partly. These 
have proved to be a godsend to the movement and have greatly 
assisted in its upbuilding. It is expected that many more of these 
wholesale companies will be started in the future as a result of the 
continued development of the co-operative movement. 

Then too there is lack of the true co-operative spirit. We Ameri- 
cans are primarily a selfish people. We have always been very 
individualistic in our ideas and actions. We have been accustomed 
to enjoy the bounties of Nature, the privilege of taking up land, of 
shifting our residence to accept new employment if the conditions 
of the old were not satisfactory. All of these things have made us 
an independent people in most of our actions. We dislike to surrender 
our individuality to the will of the majority. We are also a hetero- 
geneous people, composed of many nationalities, and as is the case 
with such nations, it has been a difficult task to weld the different 
races into a homogeneous body, a body which will work and labor 



9IO MATERIALS FOR ELEMENTARY ECONOMICS 

toward an ideal or goal as one people. Likewise we lack that fixity 
of population, that neighborhood life, which is so characteristic of 
European countries. We are also an impetuous people. We lack 
patience. We dislike to wait for the accumulation of dividends, and 
would rather trade at those stores which give "green trading stamps." 
If the enterprise in which we are interested does not prove to be 
immediately successful, we lose heart and turn our energies to other 
fields. 

Our comparatively high standard of living has not forced us to 
acquire the penny saving habit so common among the Europeans. 
We would rather give profits to the merchant as his pay for the 
management of the retail business of America than bother ourselves 
with the intricacies of the matter. We also desire a wide choice of 
goods from which to pick whenever we enter a store. As Americans, 
we have not become accustomed to the simple and monotonous 
meals of the Europeans. We desire variety of food as well as variety 
of clothing. The co-operative stores, however, owing to their limited 
capitalization, cannot furnish us with this wide choice of goods. 
Hence we usually trade at other places even though we are members 
of the co-operative association. This lack of loyalty on the part of 
the members has been a very important factor in the failure of the 
co-operative movement in the United States. 

The greatest cause of all, however, is the lack of business knowl- 
edge, so conspicuous among the co-operators. They take a man 
from his plow, like Cincinnatus of old, and place him in charge of a 
co-operative store expecting that he will carry on the business satis- 
factorily. Or as it often happens, a man will be called from behind 
a machine in the factory, after having had no business experience 
other than the payment of bills which his wife may have contracted, 
and placed behind the manager's desk. The usual result is that 
sooner or later the co-operators find that the person in whom they 
have placed their faith is either incompetent or dishonest, and the 
store is a failure. Poor business methods, injudicious purchases, 
over-stocking, wastes in weighing, and many other practices, all of 
which bring disastrous results, are very prominent in the co-operative 
movement. These, together with the universal ignorance of the 
co-operators regarding business matters, and the lack of loyalty 
displayed by them, have been, in general, the fundamental causes 
for the failure of these stores. 



SOME PROGRAMS OF SOCIAL REFORM 911 

265. WASTES IN THE COMPETITIVE DISTRIBUTION OF 

MILK' 

PRESENT SYSTEM AN EFFICIENT SYSTEM 

173 distributors, requiring services A single efficient agency could ren- 

of der superior service with 

356 men and many families 90 men 

360 horses 50 horses 

305 mUk wagons 25 horse drawn trucks and 

6 motor trucks 

2509 miles delivering 300 miles travel 

62,300 quarts of milk to 45,000 $75,000 equipment of one sanitary 

homes milk depot 

$76,600 invested in milk-room $100,000 buildings and real estate. 

equipment 
$108,800 invested in horses and 

wagons 
$282,500 total investment 

$2,000 total daily cost of distribu- $600 estimated daily cost of dis- 

tion tribution 

$720,000 yearly cost $220,000 estimated yearly cost 

The economies resulting from efficient distribution besides 
providing better service and purer milk would permit of a saving of 
at least $500,000 yearly. 

266. SOCIALISM* 

I. DEFINITION 

Few movements have been more widely discussed and at the 
same time more vaguely defined than socialism. The movements 
to which the term applies have been so diverse in starting-point and 
in goal, so variously colored by individual experience and social 
environment, that the common element is often difficult to discern. 
Socialism has always been an opposition policy, and, as is the way 
with oppositions, under its banner have marched the most motley 
forces, at one chiefly in that all were passionately protesting 
against Things as They Are. It has not yet been codified and delim- 
ited by the actualities of office. It is a living movement, changing 

' From a statement displayed at the 191 2 exhibit of the National Dairy Show 
Association, Chicago. The figures described actual conditions in an American city. 

" Adapted from O. D. Skelton, Socialism: A Critical Analysis, pp. 1-3, 16-39. 
Houghton Mifflin Co., 191 1. 



912 MATERIALS FOR ELEMENTARY ECONOMICS 

insensibly with every change in the mental horizon or material 
conditions of the time, and so impossible to label with the cheerful 
finality with which the scientist treats a paleolithic fossil. The 
significance of the term is still further clouded by its frequent use 
as a bogey with which to ward off any assault whatever on vested 
rights or vested wrongs — though serviceability for this scarecrow 
function is happily declining — and by the counter-tendency, wherever 
disrepute gives place to vogue, of sundry well-meaning sentimentalists 
to adopt the label to denote their half-baked yearnings. 

Definiteness may most easily be given the conception by con- 
sidering it in its relation to the existing industrial system, which 
socialists are wont to summarize as capitalism. This relation pre- 
sents four main aspects, which may be noted briefly. 

Socialism is in the first place an indictment of any and all indus- 
trial systems based on private property and competition. The 
indictment is urged hotly and with unsparing detail, in ponderous 
treatise and fleeting pamphlet, through party organs and on party 
platforms. 

Socialism in the second aspect presents an analysis of capitalism. 
Its origin is accounted for, and its present working described. This 
analysis is undertaken with very different motives according as the 
reigning philosophical prepossessions vary. To the Utopian believer 
in the benevolence of all Nature's intentions and the preordained 
harmony of the world, it seems necessary to account for the wide 
divergence between design and reality. To the more recent thinker, 
saturated with Hegelian or Darwinian conceptions of development, 
scientific discussion inevitably runs in terms of final goal or of origins. 
Whatever the standpoint, this phase of the subject is rarely lacking 
in any fully developed socialistic system. 

From a third viewpoint socialism presents a substitute for 
capitalism. More or less in detail, according as theoretical or tactical 
exigencies necessitate, every socialist system forecasts the ideal 
co-operative commonwealth that is to be. The ideal of the future 
of course varies with the analysis of the present; prescription follows 
diagnosis. But, neglecting minor variations, socialism in this aspect 
may be defined as the demand for collective ownership and utilization 
of the means of production and for distribution of the social dividend 
in accordance with some principle of justice. 

Finally, socialism involves a campaign against capitalism. Here 
variation is at the maximum. The tactics adopted have taken 



SOME PROGRAMS OF SOCIAL REFORM 913 

many forms, peaceful persuasion and armed revolt, parliamentarism 
and syndicalism, experimenting with "duodecimo editions of the 
New Jerusalem" and waiting for capitalism to dig its own grave. 
In each case the tactics in the campaign bear a necessary relation 
to the theoretical analysis consciously or unconsciously adopted and 
to the industrial and racial environment. 

In. each of these aspects — indictment, analysis, panacea, cam- 
paign — socialism is intelligible only as the antithesis of the competi- 
tive system. It has followed private property like its shadow. 
In every great period of social readjustment, where in the shifting of 
economic foundations and the decay of traditional moral restraints 
an untrammeled individualism temporarily asserts itself, we find an 
inevitable socialist reaction. Since it is within the past century or 
two, the period since what is called pre-eminently the Industrial 
Revolution, that the economic motive has most widely dominated 
men's activities the world over, and that within the economic field 
the spirit of individualism has had freest play, it is within this same 
period that socialism has reached fullest and clearest development. 

II. THE SOCIALIST INDICTMENT 

It is in their indictment of the existing order that socialists are 
most in harmony. Theorists who are poles apart in the remedies or the 
tactics they propose join forces in anathematizing the common enemy. 
There is, of course, wide variation in the relative emphasis laid on 
the different counts, a variation corresponding to some extent to the 
differences in the analytical viewpoints adopted: to one school the 
parasitical middleman is the worst offender, to another the exploiting 
capitalist; to one the anarchy of production is the rock of offense, 
to another the unfairness of distribution; the moralist bemoans the 
low ethical standards of a competitive society, and the artist the 
hideousness of its products. But the ammunition is freely exchanged ; 
whatever the main charge be, the more ills that can be laid at the door 
of competition and private property the better. So the twentieth- 
century socialist repeats the fiery denunciations of John Ball, and 
Morris and Marx find common ground. 

The success of socialist agitation depends not merely on the 
existence of serious industrial evils, but on the readiness of the masses 
of men to hearken to a gospel of discontent. Before reviewing 
the objective facts of modern industrial life against which criticism 
is directed, it is advisable to consider the subjective factor. However 



9 14 MATERIALS FOR ELEMENTARY ECONOMICS 

black the ills that are charged against capitalism, few socialists will 
contend that misery and oppression are new in the world. To 
understand why a fiercer resentment, a wider revolt prevails today 
than ever before in history, it is necessary first to glance at the psy- 
chology of modern social unrest. 

Not least important among the causes of the increasing discontent 
is the betterment in the condition of the masses. Spencer has called 
attention to the curious paradox that frequently "the more things 
improve the louder become exclamations about their badness." So 
with the condition of the average workingman of today as compared 
with that of his ancestors. It is beyond question that wages are 
higher, hours are shorter, housing is better, the death-rate lower. 
The state and private and institutional philanthropy have been 
active to unparalleled degree providing for him free education, free 
museums, free parks. Yet all these betterments have merely served 
to whet the appetite for more, to nourish the spirit of resistance, to 
foster a "divine discontent." The hopelessness of utter poverty 
and ignorance crushes; a half advance rouses fierce demand. 

At the same time that ambition is stirred, the goal tantalizingly 
recedes into the distance. Not merely is demand stiffened; its 
scope is immensely widened. The higher pedestal has opened new 
horizons: heavens undreamed of have been gUmpsed. The growth 
of your wants outfoots the growth of your ability to supply them. 
A smaller proportion of your demand is effectual, as the economists 
remark. For your standard is set, not by your outgrown self, nor by 
your ancestor dead and gone, but by the more fortunate about you. 
Standards have advanced faster than incomes. The luxuries of 
yesterday become today's necessities. More and more, home services 
and preparations are replaced by the tempting but expensive con- 
veniences of the open market. Speed and up-to-dateness must be 
had at any cost. 

Democracy sharpens the sting of economic inequahty. Equal 
votes suggest equal purses. By a taking analogy industrial democ- 
racy appeals as the inevitable complement of political democracy. 
Plutocratic prejudices against the ability of the people to govern 
themselves in the matter of making a living must go the way of 
outworn aristocratic prejudices against the people's ability to govern 
themselves in affairs of state. When men are born and work and die 
within the limits of caste, and are trained to pray Providence to keep 
them in their proper stations and bless the Squire and his relations, 



SOME PROGRAMS OF SOCIAL REFORM 915 

it is only the few hardiest spirits who dream of questioning the justice 
of their lot. But when the barriers of caste are down, and democratic 
theory teaches that every man is as good as his neighbor, then the 
case is altered. It may well be that the gap between modern million- 
aire and tenement dweller is less than the gap between mediaeval 
lord and peasant, but the peasant did not compare himself with his 
lord. 

At the same time the old ties which had enforced content have 
weakened. In Europe the church has long been the bulwark of 
Things as They Are. The teaching of Jesus as to the future life 
has not rarely been perverted into a consolation ofifer for the losers 
in this world's race. Let Lazarus content himself with the crumbs 
from Dives' table in this brief second we call time, and through 
eternity he shall inherit pearly mansions, and may look down on 
Dives vainly striving to enter the needle's eye or writhing in hell- 
fire. Lassalle's gibe about payment by checks on the Bank of Heaven 
had enough truth in it to hurt. The church today is reawakening 
to her social duty, but the harm has been done. 

The massing of men in great cities, subject to the socializing 
influence of the factory and the amusement park, tends in the same 
direction. The isolated farmer or the artisan in his self-suf&cient, 
impervious village group clings tenaciously to an individualist ideal. 
The tenement dweller or the mine worker, cut loose from his native 
environment, acted on every hour by socializing influences, turns 
more readily to socialism. 

More subtle and pervasive is the effect ascribed to machine 
industry itself. Professor Veblen assigns to the machine process a 
disciplinary and selective effect on the habits of thought of the work- 
men closest in touch with it. Their reasoning comes to run in terms, 
not of anthropomorphism and conventional precedent, but of " opaque, 
impersonal cause and effect." Arguments based on authenticity and 
usage or even on the once revolutionary basis of natural rights cease 
to have meaning. Especially does the "natural rights institution 
of property" fall into disfavor. Without pressing the point unduly, 
it seems undeniable that it is only among the industrial classes of 
the industrial nations that socialism has won wide adherence. Men 
engaged in pecuniary rather than in industrial employments, though 
equally propertyless, are immune. 

The miracles of nineteenth-century science have helped to accus- 
tom men's minds to schemes of revolutionary change. We have 



9l6 MATERIALS FOR ELEMENTARY ECONOMICS 

mastered nature, have weighed the sun and flashed messages across 
the ocean, have harnessed steam and electricity to do our bidding, 
and shrunk the huge earth's circumference to a forty-day Cook's 
tour. To optimistic minds it seems but child's play, compared with 
such achievements, to alter the economic system under which we live. 

Finally it may be noted what facilities for propaganda have been 
created by the new mobility of labor, the ease of transportation, the 
rise of the popular press. The barriers which a few centuries ago 
made it possible to isolate a radical force have broken down; now all 
the world's the stage. Criticism has proved a commercial success: 
the press prefers ten proletarian coppers to one plutocratic nickel. 
The fierce yellow light that beats upon a multi-millionaire keeps 
the sins of wealth ever before us. 

Thus socialism has found the ground ready for the seed of discon- 
tent. What seed has been sown? What are the chief counts in 
the indictment brought against capitalism ? 

Applying first the touchstone of efficiency in the production of 
material goods, it is charged that the competitive system has lamen- 
tably failed. The provision of society's requirements as a by-product 
of individual self-seeking has broken down. Private profit is far 
from coinciding with social gain. 

In the first place, it is charged, laissez-faire breaks down in that 
wide range of cases where utilities of undeniable importance are not 
provided because incapable of private appropriation and sale. The 
importance of forest preservation for conserving moisture is undeni- 
able. But climate and rainfall cannot be packaged and trafficked in, 
and so our forests are swept down by axe and fire. A lighthouse 
might be absolutely essential on some dangerous promontory, but 
profit-making enterprise would halt if circumstances made it impos- 
sible to collect a toll from benefited ships. 

Even more serious is the loss entailed when the lure of profit 
attracts too large, rather than too small, a proportion of the com- 
munity's working forces into particular channels. Conservative 
trust apologists have helped radical socialist critics to make the 
wastes of competition a commonplace in our thinking. The middle- 
man is again under suspicion, as in the days when forestallers, engross- 
ers, and regraters troubled the common weal. The contrast between 
the planless distribution of milk by a score of competing dealers 
serving a single street, and the systematic distribution of mail by a 
central authority, has grown hoary in socialist service. Especially 



SOME PROGRAMS OF SOCIAL REFORM 917 

in the field of public utilities, where increasing returns are the rule, 
the waste of competition is obvious — in parallel railroads, competing 
gas companies, duplicated electric light or power plants. 

Competitive selling-costs bulk very large in the "cost of produc- 
tion" of all commodities. This is clearest in the case of advertising. 
To a varying extent modern advertising is doubtless informative, 
guiding and stimulating the wants of customers. But for the most 
part it is merely competitive, catering to existing wants. Such 
advertising "does not add to the serviceability of the output, unless 

it be incidentally and unintentionally It gives vendibility, 

which is useful to the seller, but has no utility to the last buyer." 
Conservative economists estimate this waste at half the selling-price 
in many lines. In great part the work of office force and field force 
is equally void of social utility. Nor is the waste ended when the 
deal is closed: the Chicago manufacturer may have sold his goods 
in New York, and the New York manufacturer in Chicago, so that 
the item of cross-freights, serious in bulky wares, is still to be reckoned. 
For further details of competitive waste we have only to consult 
the latest trust prospectus. 

Nowhere, the indictment continues, does capitalism break down 
more conspicuously than in the equilibration of demand and supply. 
Production in competitive society is planless and anarchical. Hap- 
hazardly scattered producers prepare to meet the guessed-at demands 
of world-wide consumers. The adjustment is never exact. At 
times it fails utterly, in the periodical crises which throw the indus- 
trial mechanism hopelessly out of gear. "Commerce is at a stand- 
still, the markets are glutted, hard cash disappears, factories are 
closed, the mass of the workers are in want of the means of sub- 
sistence." 

The case for competition is no more favorable when we turn 
from quantity to quality of products. "Adulteration is a form of 
competition," was the frank apology offered by John Bright. The 
advance of science and original sin have made it possible to counter- 
feit almost every article of common household use, the more easily 
because of the lack of experience of the final purchaser. Even in 
Tennyson's day "chalk and alum and plaster were sold to the poor 
for bread," and the wooden nutmeg had rechristened a state. But the 
amateur and unsophisticated efforts of half a century ago pale before 
ths accomplishments of today — the red raspberry jam which once 
was gelatin, analine, and timothy seed; the prune-juice and fusel 



9i8 MATERIALS FOR ELEMENTARY ECONOMICS 

oil masquerading as whiskey; the chicory in the coffee and the pea- 
hulls in the chicory; the artificial oils in the flavoring-extracts; the 
labels we drink at champagne prices; the shoddy we are clothed 
in and the paper soles we walk on; the " Corot" on our walls with its 
paint scarce dry. 

Nor is it only in the selling of commodities that this fraud is 
charged. "The genius of graft," declares a socialist satire, "mani- 
fests itself in nearly all branches of human activity. Wherever 
something can be got for nothing, wherever a pinch or a squeeze of 
extra profit can be made in a transaction, wherever falsehood can be 
made to do duty for truth, a pretense for accomplishment or service, 
there is observed a metamorphosis of the protean genius of Graft" 
— the petty graft of the hackman or waiter, of the loan shark or the 
quack physician or the shyster lawyer, of the fake instalment trade 
or diploma factory. 

Even where the quality of the wares is honest enough, they have 
lost all semblance of art or seemliness. The craftsman's pride in 
his work has given place to the profit-monger's preoccupation with his 
ledger. 

Financial fraud is rated more serious even than commercial. As 
credit and corporations count for more and more, the openings for 
manipulation widen. The way is clear for promotion, running the 
gamut from the downright swindle of the cent-a-share mining com- 
pany to the honest graft of respectable over-capitalization. The 
company once formed, the divergence of interest between director 
and shareholder, temporary controller and permanent owner, tempts 
to all the thousand and one devices of manipulation. 

So much for the efficiency of the competitive system as a means 
of producing the greatest possible amount of useful material goods. 
Rated even in terms of goods and gear it is condemned. What is the 
loss and gain computed in terms of human life, what the conditions 
under which the mass of men labor to produce this wealth, what 
their share in the product and the consequent measure of material 
comfort and well-being attainable? Here the indictment becomes 
more serious and more passionate. For the vast majority, it is urged, 
competition and capitalism spell misery and failure, a precarious 
lifelong battle with hunger, stunted and narrowed development, 
premature death or cheerless old age. 

Considering first the conditions under which men earn their 
living, the socialist finds the majority sunk in "wage slavery." The 



SOME PROGRAMS OF SOCIAL REFORM 919 

capitalist's control of all the opportunities of labor gives him power 
more tyrannous than the slave-owner of old ever held. No legal bond 
compels the modern workman to labor for his masters, but the monop- 
oly of the means of livelihood is stronger than any parchment right. 
The main difference between the old and the new slavery is that the 
modern slave-driver is under no obligation to keep his "hands" 
from starving. It is for the capitalist, and the capitalist alone, to 
decide when and where work shall be begun, who shall and shall 
not be employed, what the manner of working shall be. 

It is not only from lack of freedom that the modern workman 
suffers. The work which he does at another's bidding is drearily 
monotonous work. The factory system means for the average 
workman cramping and dispiriting routine, a pitifully limited hori- 
zon, the repression of all latent power not needed for the mechanical 
day's work. Individuality is sacrificed on the altar of efficient 
production. 

The factory system not only robs the workman of freedom and of 
interest in his task, the arraignment continues, but subjects him to 
exhausting and dangerous toil. The long hours which the greed for 
dividends wrings from the workers use up every ounce of vitality, 
prevent that rounded development which can come only with moder- 
ate leisure, and wear life out at such a rate that at fifty the victim 
must be discarded for a younger man, scrapped like outworn machin- 
ery. The danger of fatal or crippling accident is ever present, with 
small possibihty of redress against the battalioned lawyers of the 
employer or liability company, and with certainty of distress and 
privation for the family whose breadwinner is helpless. 

And for this unremitting, maiming, and precarious toil, what 
share falls to the workingman when the time for the distribution of 
the joint product comes ? What possibilities of decent and comfort- 
able livelihood are placed at his disposal ? So small a share, it is 
charged, that for the mass of the workers the existing order means 
lifelong poverty. What wealth is produced is distributed with 
gross and incredible unfairness. To the few, untold millions are 
given, unlimited command over the lives and services of their fellows, 
opportunity for boundless luxury and maddening display; to the 
many, a starving pittance which barely holds body and soul together 
and shuts out all hope of development and culture. 

''In the United Kingdom," concludes a recent socialistic investi- 
gator (Chiozza-Money), "out of a population of 43,000,000, as many 



920 MATERIALS FOR ELEMENTARY ECONOMICS 

as 38,000,000 are poor The United Kingdom is seen to 

contain a great multitude of poor people veneered with a thin layer 

of the comfortable and the rich About one seventieth part 

of the population owns far more than one-half of the entire accumu- 
lated wealth, public and private, of the United Kingdom," And 
even in the United States, with its comparative freedom from caste 
and inherited privilege, and its half a fertile continent to exploit, 
another socialist (Hunter) charges that 10,000,000 people are sunk in 
poverty, 4,000,000 of them in receipt of relief. 

The fractional share of the national dividend which falls to the 
manual workers makes it impossible to secure any more favorable 
surroundings for the hours of leisure than for the hours of work. 
For the pittance that can go for rent there are available only drably 
hideous, overcrowded, and unsanitary dwellings. Such housing 
conditions as these mean low vitality and constant exposure to infec- 
tion, and in view of the workers' inability to obtain the needed rest 
or change of air or expert attention, involve a death-roll out of all 
proportion. 

What is the effect of competitive industrialism on moral life? 
Here again the tally against capitalism is marked deep in the socialist 
stick. "Next to intemperance in the enjoyment of intoxicating 
liquors," declares Engels, "one of the principal faults of English 
workingmen is sexual license. But this too follows with relentless 
logic, with inevitable necessity, out of the position of a class left to 
itself, with no means of making fitting use of its freedom. The 
bourgeoisie has left the working class only these two pleasures, while 
imposing upon it a multitude of labors and hardships, and the conse- 
quence is that the workingmen, in order to get something from life, 
concentrate their whole energy upon these two enjoyments, carry 
them to excess, surrender to them in the most unbridled manner." 
The insufficiency of the wages upon which many a hard-working girl 
is supposed to keep body and soul together forces recourse "to the 
oldest trade in the world. Not till we measure [this element in 
wages] will the world know the true cost of 'cheap labor.'" Family 
life becomes impossible, what with the absence of the father and often 
of the mother all day long, the frequency of marriage merely for the 
support which the woman cannot otherwise obtain, the promiscuity 
and crowding of the workers' homes. 

And then society adds insult to injury by blaming on the individual 
the lapses its own perverse social arrangements have caused. 



SOME PROGRAMS OF SOCIAL REFORM 921 

267. THE NATIONAL PLATFORM OF THE SOCIALIST PARTY^ 

The representatives of the Socialist party in National Convention 
at Indianapolis, declare that the capitalist system has outgrown its 
historical function, and has become utterly incapable of meeting the 
problems now confronting society. We denounce this outgrown 
system as incompetent and corrupt and the source of unspeakable 
misery and suffering to the whole working class. 

Under this system the industrial equipment of the Nation has 
passed into the absolute control of a plutocracy which exacts an 
annual tribute of millions of dollars from the producers. Unafraid of 
any organized resistance, it reaches out its greedy hands over the still 
undeveloped resources of the Nation — the land, the mines, the forests, 
and the water powers of every State in the Union. 

In spite of the multiplication of labor-saving machines and 
improved methods in industry which cheapen the cost of production, 
the share of the producers grows ever less, and the prices of all the 
necessities of life steadily increase. The boasted prosperity of this 
Nation is for the owning class alone. To the rest it means only greater 
hardship and misery. The high cost of living is felt in every home. 
Millions of wage-workers have seen the purchasing power of their wages 
decrease until life has become a desperate battle for mere existence. 

Multitudes of unemployed walk the streets of our cities or trudge 
from State to State awaiting the will of the masters to move the 
wheels of industry. 

The farmers in every State are plundered by the increasing prices 
exacted for tools and machinery and by extortionate freight rates and 
storage charges. 

Capitalism denounced. — Capitalist concentration is mercilessly 
crushing the class of small business men and driving its members into 
the ranks of proper tyless wage-workers. The overwhelming majority 
of the people of America are being forced under a yoke of bondage by 
this soulless industrial despotism. 

It is this capitalist system that is responsible for the increasing bur- 
den of armaments, the poverty, slums, child labor, most of the insanity, 
crime and prostitution, and much of the disease that afSicts mankind. 

Under this system the working class is exposed to poisonous con- 
ditions, to frightful and needless perils to life and limb, is walled 
around with court decisions, injunctions and unjust laws, and is 

' Text of the platform adopted at Indianapolis, Ind., May 16, 191 2. 



922 MATERIALS FOR ELEMENTARY ECONOMICS 

preyed upon incessantly for the benefit of the controlling oligarchy of 
wealth. Under it also, the children of the working class are doomed 
to ignorance, drudging toil and darkened lives. 

In the face of these evils, so manifest that all thoughtful observers 
are appalled at them, the legislative representatives of the Republican 
and Democratic parties remain the faithful servants of the oppressors. 
Measures designed to secure to the wage-earners of this Nation as 
humane and just treatment as is already enjoyed by the wage- 
earners of all other civilized nations have been smothered in committee 
without debate, and laws ostensibly designed to bring relief to the 
farmers and general consumers are juggled and transformed into 
instruments for the exaction of further tribute. The growing unrest 
under oppression has driven these two old parties to the enactment of 
a variety of regulative measures, none of which has limited, in any 
appreciable degree, the power of the plutocracy, and some of which 
have been perverted into means for increasing that power. Anti- 
trust laws, railroad restrictions and regulations, with the prosecu- 
tions, indictments and investigations based upon such legislation, 
have proved to be utterly futile and ridiculous. 

Nor has this plutocracy been seriously restrained or even 
threatened by any Republican or Democratic executive. It has con- 
tinued to grow in power and insolence alike under the administrations 
of Cleveland, McKinley, Roosevelt, and Taft. 

In addition to this legislative juggling and this executive con- 
nivance, the courts of America have sanctioned and strengthened the 
hold of this plutocracy as the Dred Scott and other decisions strength- 
ened the slave power before the Civil War. 

We declare, therefore, that the longer sufferance of these conditions 
is impossible, and we purpose to end them all. We declare them to 
be the product of the present system in which industry is carried on 
for private greed, instead of for the welfare of society. We declare, 
furthermore, that for these evils there will be and can be no remedy 
and no substantial relief except through socialism, under which 
industry will be carried on for the common good and every worker 
receive the full social value of the wealth he creates. 

Society is divided into warring groups and classes, based upon 
material interests. Fundamentally, this struggle is a conflict between 
the two main classes one of which, the capitalist class, owns the means 
of production, and the other, the working class, must use these means 
of production on terms dictated by the owners. 



SOME PROGRAMS OF SOCIAL REFORM 923 

The capitalist class, though few in numbers, absolutely controls 
the Government — legislative, executive, and judicial. This class owns 
the machinery of gathering and disseminating news through its organ- 
ized press. It subsidizes seats of learning — the colleges and schools — 
and even religious and moral agencies. It has also the added prestige 
which established customs give to any order of society, right or wrong. 

The working class, which includes all those who are forced to work 
for a living, whether by hand or brain, in shop, mine or on the soil, 
vastly outnumbers the capitalist class. Lacking effective organization 
and class solidarity, this class is unable to enforce its will. Given such 
class solidarity and effective organization, the workers will have the 
power to make all laws and control all industry in their own interest. 

All political parties are the expression of economic class interests. 
All other parties than the Socialist party represent one or another 
group of the ruling capitalist class. Their political conflicts reflect 
merely superficial rivalries between competing capitalist groups. 
However they result, these conflicts have no issue of real value to the 
workers. Whether the Democrats or Republicans win politically, it 
is the capitalist class that is victorious economically. 

Socialism the expression of the workers. — The socialist party is the 
political expression of the economic interests of the workers. Its 
defeats have been their defeats and its victories their victories. It is 
a party founded on the science and laws of social development. It 
proposes that, since all social necessities today are socially produced, 
the means of their production and distribution shall be socially owned 
and democratically controlled. 

In the face of the economic and political aggressions of the 
capitalist class the only reliance left the workers is that of their 
economic organizations and their political power. By the intelligent 
and class-conscious use of these, they may resist successfully the 
capitalist class, break the fetters of wage slavery, and fit themselves 
for the future society, which is to displace the capitalist system. The 
Socialist party appreciates the full significance of class organization 
and urges the wage-earners, the working farmers and all other useful 
workers everywhere to organize for economic and political action, and 
we pledge ourselves to support the toilers of the field as well as those 
in the shops, factories and mines of the Nation in their struggles for 
economic justice. 

In the defeat or victory of the working class party in this new 
struggle for freedom lies the defeat or triumph of the common people 



924 MATERIALS FOR ELEMENTARY ECONOMICS 

of all economic groups, as well as the failure or the triumph of popular 
government. Thus the Socialist party is the party of the present-day 
revolution, which marks the transition from economic individualism to 
socialism, from wage slavery to free co-operation, from capitalist 
oligarchy to industrial democracy. 

Working programme. — As measures calculated to strengthen the 
working class in its fight for the realization of its ultimate aim, the 
Co-operative Commonwealth, and to increase its power of resistance 
against capitalist oppression, we advocate and pledge ourselves and 
our elected officers to the following programme: 

Collective ownership. — First: The collective ownership and 
democratic management of railroads, wire and wireless telegraphs and 
telephones, express service, steamboat lines and all other social means 
of transportation and communication and of all large-scale industries. 

Second: The immediate acquirement by the municipalities, the 
States or the Federal Government of all grain elevators, stock yards, 
storage warehouses, and other distributing agencies, in order to reduce 
the present extortionate cost of living. 

Third: The extension of the public domain to include mines, 
quarries, oil wells, forests and water power. 

Fourth: The further conservation and development of natural 
resources for the use and benefit of all the people: 

(a) By scientific forestation and timber protection. 

(b) By the reclamation of arid and swamp tracts. 

(c) By the storage of flood waters and the utilization of water 
power. 

(d) By the stoppage of the present extravagant waste of the soil 
and of the products of mines and oil wells. 

(e) By the development of highway and waterway systems. 
Fifth : The collective ownership of land wherever practicable, and 

in cases where such ownership is impracticable, the appropriation by 
taxation of the annual rental value of all land held for speculation 
or exploitation. 

Sixth: The collective ownership and democratic management of 
the banking and currency system. 

Unemployment. — The immediate Government relief of the 
unemployed by the extension of all useful public works. All persons 
employed on such works to be engaged directly by the Government 
under a work day of not more than eight hours and at not less than 
the prevailing union wages. The Government also to establish 



SOME PROGRAMS OF SOCIAL REFORM 925 

employment bureaus; to lend money to States and municipalities, 
without interest, for the purpose of carrying on public works, and to 
take such other measures within its power as will lessen the widespread 
misery of the workers caused by the misrule of the capitalist class. 

Industrial demands. — The conservation of human resources, 
particularly of the lives and well-being of the workers and their 
families: 

First: By shortening the work day in keeping with the increased 
productiveness of machinery. 

Second : By securing to every worker a rest period of not less than 
a day and a half in each week. 

Third: By securing a more effective inspection of workshops, 
factories and mines. 

Fourth : By forbidding the employment of children under sixteen 
years of age. 

Fifth : By abolishing the brutal exploitation of convicts under the 
contract system and prohibiting the sale of goods so produced in com- 
petition with other labor. 

Sixth : By forbidding the interstate transportation of the products 
of child labor, of convict labor and of all uninspected factories and 
mines. 

Seventh: By abolishing the profit system in Government work, 
and substituting either the direct hire of labor or the awarding of 
contracts to co-operative groups of workers. 

Eighth: By establishing minimum wage scales. 

Ninth : By abolishing official charity and substituting a non- 
contributory system of old-age pensions, a general system of insurance 
by the State of all its members against unemployment and invalidism 
and a system of compulsory insurance by employers of their workers, 
without cost to the latter, against industrial diseases, accidents 
and death. 

Political demands. — First: The absolute freedom of press, speech 
and assemblage. 

Second: The adoption of a graduated income tax, the increase 
of the rates of the present corporation tax and the extension of 
inheritance taxes, graduated in proportion to the value of the estate 
and to nearness of kin — the proceeds of these taxes to be employed 
in the socialization of industry. 

Third: The gradual reduction of all tariff duties particularly 
those on the necessities of life. The Government to guarantee the 



926 MATERIALS FOR ELEMENTARY ECONOMICS 

re-employment of wage-earners who may be disemployed by reason 
of changes in tariff schedules. 

Fourth: The abolition of the monopoly ownership of patents 
and the substitution of collective ownership, with direct rewards to 
inventors by premiums or royalties. 

Fifth: Unrestricted and equal suffrage for men and women. 

Sixth: The adoption of the initiative, referendum and recall and 
of proportional representation, nationally as well as locally. 

Seventh: The abolition of the Senate and of the veto power of 
the President. 

Eighth: The election of the President and Vice-President by direct 
vote of the people. 

Ninth: The abolition of the power usurped by the Supreme Court 
of the United States to pass upon the constitutionality of the legisla- 
tion enacted by Congress. National laws to be repealed only by act 
of Congress or by a referendum vote of the whole people. 

Tenth : The abolition of the present restrictions upon the amend- 
ment of the Constitution, so that that instrument may be made 
amendable by a majority of the voters in a majority of the States. 

Eleventh: The granting of the right of suffrage in the District of 
Columbia with representation in Congress and a democratic form of 
municipal government for purely local affairs. 

Twelfth: The extension of democratic government to all United 
States territory. 

Thirteenth : The enactment of further measures for general edu- 
cation and particularly for vocational education in useful pursuits. 
The Bureau of Education to be made a department. 

Fourteenth : The enactment of further measures for the conserva- 
tion of health. The creation of an independent Bureau of Health, 
with such restrictions as will secure full liberty to all schools of 
practice. 

Fifteenth: The separation of the present Bureau of Labor from 
the Department of Commerce and Labor and its elevation to the rank 
of a department. 

Sixteenth : Abolition of all Federal District Courts and the United 
States Circuit Courts of Appeals. State courts to have jurisdiction 
in all cases arising between citizens of the several States and foreign 
corporations. The election of all judges for short terms. 

Seventeenth : The immediate curbing of the power of the courts to 
issue injunctions. 



SOME PROGRAMS OF SOCIAL REFORM 927 

Eighteenth : The free administration of justice. 

Nineteenth: The calling of a convention for the revision of the 
Constitution of the United States. 

Such measures of relief as we may be able to force from capitalism 
are but a preparation of the workers to seize the whole powers of 
government, in order that they may thereby lay hold of the whole 
system of socialized industry and thus come to their rightful 
inheritance. 



